Choosing the Right Loan
 

 

 

Choosing the Right Loan

Finding the right type of loan to suit your needs can be a bit tricky. It involves choosing between a home equity line of credit, a standard home equity loan, or some other type of loan that does not use your house as collateral. Because every situation is different, there is no standard "one size fits all" answer. Instead we will give some guidelines that will help you make the right choice.

Interest
Getting a good interest rate is very important when applying for your loan. This is a great factor to base your choice on. It affects the amount of your monthly payment as well has how much you are paying for the loan.

Generally, getting a fixed interest rate is a good idea. Variable rates can increase based on market trends or are scheduled to increase after a certain number of months or years. If you do choose a variable rate, be sure that you fully understand what factors can affect the rate and how it will affect your payments.

Try to avoid terms in your loan contract that require you to pay penalties or increased interest rates becuase of late or missed payments. (Click for more information on terms to avoid)

The interest rate differs on each loan type. Standard second mortgage home equity loans generally have fixed interest rates and fixed payments. On the other hand, home equity loan credit lines have more flexible interest rates that can be affected by many factors.

Do the math and see what rates will benefit you throughout the term of your loan. Don't be intimidated by the numbers, and never be afraid to ask your loan officer questions. Because of the risks involved, getting the right loan is very important.

Taxes
Taxes may apply to your loan depending on where you are located and the type of loan you take out. The FTC says that home equity credit line has less taxes involved, but these terms are still dependent on your location. Needless to say, you should choose the option that is more suitable for your situation.

Payments
Your monthly payments are another key factor that should be considered when getting a home equity loan. You need to take into account your monthly income, and make sure you are able to afford the monthly payments. Usually a home equity lender will not grant you a loan if you do not meet the necessary requirements, but a fraudulant lender will.

Home equity credit line payments are based on the amount of money you spend from the credit line. This method allows you some control over your monthly payments but it can become unpredictable if you spend too much. The second mortgage home equity loan payments are usually fixed and are easier to budget.

Closing Costs
Your closing costs will differ in amounts based on a lot of different factors. These factors include your interests rate, the inclusion or exclusion of certain contract terms, or the existance of a balloon payment. It is not generally a good idea to make your descision based on the amount of your closing cost alone.

You should try to find a middle ground where you can afford the closing costs without having to pay for it in the long run. The trick is to be sure to make your own calculations and negotiate a payment that is acceptable for you.

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