How Home Equity Loan Interest Rates Are Calculated
After living in your house for several years, you have built equity in it and can now use it as collateral for revolving credit. Financial institutions have different methods for determining how much you can borrow. Repayment amounts will vary depending on the rate. Home equity loan interest rates are determined in a number of ways.
In general, institutions use a formula to decide how much you can borrow. They use a percentage of the value of the home and then deduct what you still owe. After using other information like your credit rating, they come up with a figure. Financial companies vary and the total amount may differ, depending on the criteria used.
All loans should be undertaken carefully and with the knowledge of all the details included in the contract. Those who use their homes for collateral must be very careful in not defaulting on the loan. Default of the loan could mean the loss of their home.
The interest rates associated with this type of credit are typically variable rates, not fixed. Variable interest is based on an index, like the prime. When the prime rate changes, so does the variable interest rate. In your loan contract, you will see a referral to prime plus two points. That means your rate is two points higher than the prime rate.
As the index changes, whether up or down, your interest changes, too. It will affect the monthly and total amounts you need to pay back. Make sure you know exactly how your lending institution calculates the rate.
Some of the details you need to become familiar with include which index is used, how often it changes and how high it has risen in the past. There should be a ceiling on the rate, so that if the index goes above the ceiling, you will not be charged the additional amount.
For loans that use homes as collateral, must legally include a ceiling that is effective over the life of the plan. The plan works for both the consumer and lender. The ceiling rate stops the payment from going beyond a certain point, but may also state that it cannot go below a certain percentage, so the lender is not at risk.
You may take advantage of introductory rates, for example a discounted rate for the first six months of your repayment period. This may make it more appealing, but caution should be used in jumping in before you have all of the information.
Fees are added to loans to cover expenses incurred while processing the loan. Property appraisals are used to determine the value of the house. Application fees for processing are added, as are up-front points and closing costs. The infusion of cash can help homeowners tremendously. Make sure you are aware of all of the details and requirements before signing. You can also shop around at more than one institution and ask about home equity loan interest rates.
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