Home Equity Mortgage Rates: What To Avoid

If you are looking to refinance your home, you'll probably be researching home equity mortgage rates. While interest rates are certainly an important factor to consider when shopping for any type of loan, they should not always be the only factor used to make a decision. There are some home equity loans that will simply wind up costing you too much money in the end; therefore, it is best to understand the potential traps or pitfalls that may be associated with a home refinance loan.

Balloon Payments

When applying for a home equity line of credit (HELOC), you should know that most fixed rate second loans have a balloon payment. Moreover, the amortization period is usually for 15 or 30 years. However, home equity lines of credits offer an interest only "draw" period. A draw period is the amount of years that a borrower can withdraw funds from the line. The most common draw periods are five or ten years. After the draw period, the HELOC loan begins to fully amortize into the remaining loan term.

Therefore, during the draw period, you are only paying the interest on the amount of the line of credit that has been used or for any other fees or charges that were financed. So, your payments may not be enough to reduce the principal on the loan very much or at all. Furthermore, once the loan term is completed you may still owe a large sum that will need to be paid immediately or otherwise rolled into another refinancing option.

Introductory Rate Periods

You should always be aware of HELOC loans that offer very low starting monthly payments. Depending on the loan, these low introductory rates will be made available for between 3 and 24 months; however, after the initial introductory rate period, the rates will usually increase substantially and may increase the monthly payment beyond your ability to pay. So, always make sure that you can afford the payment of the loan – after the introductory rate period ends.

Excessive Documentation and Service Fees

Many lenders may attempt to lessen the amount of actual spendable cash in your home equity line of credit by charging excessive documentation fees for things like copying or postage fees. Be sure you ask about any fees that you don’t understand or feel are simply too high. Most lenders will waive or reduce the fees.

You should always choose a second mortgage lender carefully and do as much research on the company as possible. Also, make sure that you read the terms of the loan contract very carefully. You should request that the loan contract be made available to you a few days before the closing. Once you have the document, you should take the time to review every portion of it and make sure you understand it completely - before signing the loan documents.

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