There is no doubt that the larger the loan, the more expensive it is to pay it back. But if the right interest rate is charged, then some serious savings can be made. Even if home equity loans normally come with very competitive interest rates, repayments can be kept to a minimum if the rate is wisely chosen.
Of course, taking out a loan with the equity on your home used as security is arguably the best way to raise a large sum of money. It depends on the value of the equity held, but it can make accessible funds as high as $150,000. Finding the best interest rates can be the difference between repayments being affordable and not.
For this reason, issues relating to the interest charged on any equity loan deal are extremely important and should be paid careful attention to. Here are some of the issues that should be looked at.
Fixed Rates or Variable Rates?
While the interest rate to be charged on a home equity loan is usually decided by the lender, borrowers can choose between fixed rates and variable rates. But what are the differences between them?
The chief difference is that a fixed rate creates a consistent repayment sum that never changes. And while the rate itself is higher than a variable rate, it is arguably the best interest rate for those on a tight budget.
A variable rate, meanwhile, changes in line with market developments, so the amount to be repaid every month can fluctuate. It is a great option when interest rates are low, but when the rates increase for economic reasons, the repayments increase accordingly. And because an equity loan can often be more than $100,000, this can translate to very large increases.
Terms to Expect
Normally, the rates charged on a home equity loan are quite low, and certainly a lot less than on unsecured loans. But the relative stability of the source of security (property) means that lenders can feel confident they will get their money back. But what are the terms to expect for a deal to be a truly good one?
Well, with a fixed rate loan, the best interest rate is going to be around 4%, depending on the lender and the size of the loan. On a $100,000 loan over 20 years, it will probably require monthly repayments of around $850. A variable rate, however starts at about 3.5%, requiring repayments of around $700. But the rate can increase at any time, even double if the market dictates.
Normally, however, because of the length of the loan term involved, it is possible to mix both fixed and variable rates. The fixed rate can apply for the first 3 or 5 years, allowing the borrower to get a grip on their budget, while the final 15 years or so will be variable, causing the equity loan to become a lot more expensive.
Other Issues to Consider
Of course, the term of a home equity loan is not always 25 years. Most lenders will cap the term to 25 years, but also demand a minimum term of 3 years. This can play a key role in determining the affordability of the loan, but since the borrower can choose practically any term between the two, it is easy to find an acceptable deal.
Variable rates are ideal for short-term loans, where there is not enough time for major fluctuations in the marketplace to develop. The best interest rate for long-term loans are fixed rates since the budget can be adhered to easily.
Discussing your best options with lenders is hugely important. But when these lenders are sourced online, be sure to check their reputation through the BBB website. An equity loan can prove hugely expensive if the lender turns out to have a range of hidden charges and penalties too.