When taking out a home equity loan, there are certain things you need to look for and understand. Often what seems like a good deal up front can quickly turn into a bad deal later. Lets talk about some of the aspects of a loan you need to be aware of upfront:
Terms - is it a fixed rated loan, or can the rates rise over time? What seems like a good rate to start the loan often ends up being very costly later. For example, if you have an adjustable rate loan that is at 6% when you take it out and then interest rates rise to 7 percent you payment will go up substantially. Is it better to start the loan at 6.25 percent and keep it the same, or take a chance of it going up?
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Points - Is the lender charging you points? Most lenders charge a percentage of the loan up front, for commissions, etc, for their sales people. These points can vary, depending on the Loan Company and type of loan, etc. Typically they can run from ½ of a point, up to 3 or 4 points (rare nowadays). 1 point would be 1%, so on a $50,000.00 loan, that would be $500.00 up front. Be sure to shop lenders, as many lenders will give loans with no points.
Pre-payment penalties. - i.e., will it cost you money to pay it off early? Many 2nd loans come with a prepayment penalty. A pre-payment penalty pretty much locks you into paying the loan off over the entire term of the loan, and if you pay it off early, your lender will add a penalty, which can cost you thousands of dollars. I can think of only one instance where a prepayment penalty is a acceptable, and that's only if you are sure you are not going to pay it off early (whoever is?) AND you get a better interest rate for accepting the penalty.
Insurance - Are there hidden insurance costs in the loan that you may not want? Any time you take out a loan, you can get credit insurance. You can get credit life, which pays off the loan if you should die, or disability insurance, which will make your payments if you are disabled, etc. If you feel that you need these extra costs, that's ok, just beware of them, and know that getting insurance through a loan company is not going to be the cheapest way, as they may be making a commission on the insurance they sell you. Usually you can get better and cheaper insurance through your local insurance company.
Do interest rates go up if you are late with the payments? Usually when a loan is delinquent, there will be a late payment penalty, but sometimes there is a default interest rate increase clause in the loan that automatically raises the interest rate on the loan when your payment is late. This can be very costly. Be sure to read the fine print!
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