Choosing a Loan
There are literally hundreds of lenders offering a multitude of
loan options that makes determining the best loan for your situation
a complex endeavor. Since you may be making payments on a loan anywhere
from 15 years to 40 years depending on the term, it is imperative
that you work closely with us in choosing the right lender and loan
that works best for you. What follows is a breakdown of the generally
available residential loan programs.
This is a home loan with an ensured interest rate that
will remain at a specific rate for the term of the loan. About 75
percent of all home mortgages have fixed rates. One reason fo rthis
is that most home sold are to buyers who plan on living in their
property for many years. When you choose the length of your repayment
(usually 15, 20 or 30 years), keep in mind that while shorter term
loans may have higher monthly payments, they also let you pay less
interest and build equity faster.
The most popular loan is a 30-year fixed-rate loan. The reasons
It provides the borrower with reasonable monthly payments.
It's ideal for the homebuyer who plans on remaining in the home
for more than 5 years.
The 20-year mortgage often offers a lower interest rate when
compared to a 30-year loan. This loan amortizes principal and
interest over a 20-year period, 10 years less than the traditional
30-year mortgage. This may save you a considerable amount of total
interest when paid over the life of the loan.
The advantage of a 15-year mortgage is that its interest rate
is generally lower than a 30-year or 20-year loan. Such a short-term
loan will save you a significant amount of interest over the life
of the loan. By paying off the loan in only fifteen years, you
also build up equity in your home sooner. A 15-year loan allows
you to own your home clear of debt much quicker when compared
to longer term loans. This may be important if you are approaching
retirement or have other large expenses to cover such as financing
your children's education. However, the monthly payments you make
on a 15-year loan will be significantly higher than those you
make on a 30-year or a 20-year loan for the same loan amount.
With an adjustable-rate mortgage (ARM), the interest rate you
pay is adjusted from time to time to keep it in line with changing
market rates. This means that when interest rates go up, your
monthly loan payment may go up as well. On the other hand, when
interest rates go down, your monthly loan payment may also go
down. ARMs are attractive because they may initially offer a lower
interest rate than fixed-rate loans. Since the monthly payments
on an ARM start out lower than those of a fixed-rate loan of the
same amount, you should be able to qualify for a larger loan.
The chief drawback, of course, is that your monthly payment may
increase when interest rates go up. The types of people who typically
benefit from an ARM are those that are planning to move or refinance
in the near future, people with a high likelihood of increasing
their income in later years, and people who need lower initial
interest rates on their loans to be able to buy a home. How much
your payment can increase will depend on the terms of your loan.
Before applying for an ARM, be sure you know how high your monthly
payment can go - the so-called 'worst-case scenario'. An ARM has
two 'caps' or limits on how large an interest rate increase is
permitted: One cap sets the most that your interest rate can go
up during each adjustment period, and the other cap sets the maximum
total amount of all interest adjustments over the life of the
loan. The rates on an ARM usually change once or twice a year,
and there is typically a lifetime rate cap (or limit) on both
the amount of each individual rate adjustment, and the total amount
the rate can change over the whole term of the loan.
Example: If your loan starts at 5 percent,
has a 2 percent per-adjustment cap, and a lifetime adjustment
cap of 4 percent, you know that your loan might go up to 7 percent
the first time the rate changes. You also know that the rate
can never go over 9 percent over the life of the loan (5 percent
start + 4 percent lifetime cap). Only you can determine if you
would feel comfortable paying this interest rate sometime in
Some ARMs offer a conversion feature which allows you to convert
from an adjustable-rate to a fixed-rate loan at certain times
during the life of your loan. Ask your lender about this feature
when researching ARMs. One important thing to know when comparing
ARMs is that the interest rate changes on an ARM are always tied
to a financial index. A financial index is a published number
or percentage, such as the average interest rate or yield on Treasury
HELOC Loan: What is a Home Equity Line of Credit?
A home equity line is a form of revolving credit in which your home
serves as collateral. Because the home is likely to be a consumer's
largest asset, many homeowners use their credit lines only for major
items such as education, home improvements, or medical bills and
not for day-to-day expenses. With a home equity line, you will be
approved for a specific amount of credit -- your credit limit --
meaning the maximum amount you can borrow at any one time while
you have the plan. Many lenders set the credit limit on a home equity
line by taking a percentage (say 75%) of the appraised value of
the home and subtracting the balance owed on the existing mortgage.
Appraisal of home $100,000
Percentage x 75%
Percentage of appraised value $75,000
Less existing loan - $40,000
Potential credit line = $35,000
In determining your actual credit line, the lender will also consider
your ability to repay by looking at your income, debts, and other
financial obligations, as well as your credit history.
Home equity lines of credit often set a fixed time during which
you can borrow money, such as 10 years. When this period is up,
the plan may allow you to renew the credit line. But in a plan that
does not allow renewals, you will not be able to borrow additional
money once the time has expired. Some plans may call for payment
in full of any outstanding balance. Others may permit you to repay
over a fixed time, for example 10 years.
Once approved for the home equity plan, usually you will be able
to borrow up to your credit limit whenever you want. Typically,
you will be able to draw on your line by using special checks. Under
some plans, borrowers can use a credit card or other means to borrow
money and make purchases using the line. However, there may be limitations
on how you use the line. Some plans may require you to borrow a
minimum amount each time you draw on the line (for example, $300)
and to keep a minimum amount outstanding. Some lenders also may
require that you take an initial advance when you first set up the
What Should You Look for When Shopping for a Plan?
If you decide to apply for a home equity line, look for the plan
that best meets your particular needs. Look carefully at the credit
agreement and examine the terms and conditions of various plans,
including the annual percentage rate (APR) and the costs you'll
pay to establish the plan. The disclosed APR will not reflect the
closing costs and other fees and charges, so you'll need to compare
these costs, as well as the APRs, among lenders.
Interest Rate Charges and Plan Features.
Home equity lines of credit typically involve variable interest
rates rather than fixed rates. A variable rate must be based on
a publicly available index (such as the prime rate published in
some major daily newspaper or a U.S. Treasury bill rate). The interest
rate will change, mirroring fluctuations in the index. To figure
the interest rate that you will pay, most lenders add a margin,
such as 2 percentage points, to the index value. Because the cost
of borrowing is tied directly to the index rate, it is important
to find out what index and margin each lender uses, how often the
index changes, and how high it has risen in the past.
Sometimes lenders advertise a temporarily discounted rate for home
equity lines -- a rate that is unusually low and often lasts only
for an introductory period, such as six months.
Variable rate plans secured by a dwelling must have a ceiling (or
cap) on how high your interest rate can climb over the life of the
plan. Some variable rate plans limit how much your payment may increase
and also how low your interest rate may fall if interest rates drop.
Some lenders may permit you to convert a variable rate to a fixed
interest rate during the life of the plan, or to convert all or
a portion of your line to a fixed-term installment loan.
Agreements generally will permit the lender to freeze or reduce
your credit line under certain circumstances. For example, some
variable rate plans may not allow you to get additional funds during
any period the interest rate reaches the cap.
Costs to Obtain a Home Equity Line.
Many of the costs in setting up a home equity line of credit are
similar to those you pay when you buy a home. For example:
A fee for
a property appraisal, which estimates the value of your home.
fee, which may not be refundable if you are turned down for credit.
charges, such as one or more points (one point equals one percent
of the credit limit).
costs, which include fees for attorneys, title search, mortgage
preparation and filing, property and title insurance, as well
during the plan. For example, some plans impose yearly membership
or maintenance fees.
may be charged a transaction fee every time you draw on the credit
You could find yourself paying hundreds of dollars to establish
a home equity line of credit. If you were to draw only a small amount
against your credit line, those charges and closing costs would
substantially increase the cost of the funds borrowed. On the other
hand, the lender's risk is lower than for other forms of credit
because your home serves as collateral. Thus, annual percentage
rates for home equity lines are generally lower than rates for other
types of credit. The interest you save could offset the initial
costs of obtaining the line. In addition, some lenders may waive
a portion or all of the closing costs.
How Will You Repay Your Home Equity Line of Credit?
Before entering into a plan, consider how you will pay back any
money you might borrow. Some plans set minimum payments that cover
a portion of the principal (the amount you borrow) plus accrued
interest. But, unlike the typical installment loan, the portion
that goes toward principal may not be enough to repay the debt by
the end of the term. Other plans may allow payments of interest
only during the life of the plan, which means that you pay nothing
toward the principal. If you borrow $10,000, you will owe that entire
sum when the plan ends.
Are Payments Flexible?
Regardless of the minimum payment required, you can pay more than
the minimum, and many lenders may give you a choice of payment options.
Consumers often will choose to pay down the principal regularly
as they do with other loans. For example, if you use your line to
buy a boat, you may want to pay it off as you would a typical boat
Whatever your payment arrangements during the life of the plan
-- whether you pay some, a little, or none of the principal amount
of the loan -- when the plan ends you may have to pay the entire
balance owed, all at once. You must be prepared to make this balloon
payment by refinancing it with the lender, by obtaining a loan from
another lender, or by some other means. If you are unable to make
the balloon payment, you could lose your home.
Can My Monthly Payment Change?
With a variable rate, your monthly payments may change. Assume,
for example, that you borrow $10,000 under a plan that calls for
interest-only payments. At a 10 percent interest rate, your initial
payments would be $83 monthly. If the rate should rise over time
to 15 percent, your payments will increase to $125 per month. Even
with payments that cover interest plus some portion of the principal,
there could be a similar increase in your monthly payment, unless
the agreement calls for keeping payments level throughout the plan.
What if I Sell My Home?
When you sell your home, you probably will be required to pay off
your home equity line in full. If you are likely to sell your house
in the near future, consider whether it makes sense to pay the up-front
costs of setting up an equity credit line. Also keep in mind that
leasing your home may be prohibited under the terms of your home
What is an APR?
APR stands for annual percentage rate. It is the annualized cost
of credit, expressed as a percentage. The APR calculation considers
certain fees to reflect the cost of credit in addition to interest.
What is LTV?
LTV stands for loan-to-value, which is the ratio of the mortgage
loan amount to the property's value. For example, if your property
is worth $100,000 and $80,000 is owed on the first mortgage, the
LTV ratio is 80.