Find out when and how to act
Step 3: Your Home Equity Loan
The range of your choices are probably greater than when you
acquired your initial home mortgage. Besides 15 and 30 year
fixed rate mortgages, there are adjustable rate mortgages (ARM's)
with corresponding adjustment periods, government loans through the
VA or FHA, loans containing private mortgage insurance, and second
mortgage combo loans without PMI.
Which Loan Should I Apply For?
The majority of homeowners lean towards fixed rate mortgages because
of the peace of mind that comes with knowing precisely how much
interest will be paid each month - ARM's are too much of a gamble
for most people. Sometimes people apply for fixed rate
mortgages because they are under the assumption that fixed rates
only come with 15 or 30 year mortgages. This is a
misconception, however, because a fixed rate can be used on any
loan, no matter its lifetime.
Like fixed rate mortgages,
adjustable-rate mortgages can come with a 15 and 30 year lifetime.
They are enticing due to the wide variation of adjustment
periods they offer - Some adjust every year, while others only have
the possibility of changing every three, five, or, seven years.
Those with the most adjustment periods initially come with lower
rates than other mortgages. Yet, even the ARM's with
infrequently changing adjustment periods can have lower rates than
some fixed mortgages. Both have their advantages: The
frequently adjusting mortgage will have the lowest possible rate
from the get go, while the infrequently adjusting mortgage will more
greatly facilitate refinancing later on down the road.
The only ways to avoid PMI, which can
cost around $150 per month, is to refinance your mortgage for no
more than 80% of your homes current appraisal, or to make a
down-payment of at least 20%. Another option is to take up to 10%
more of the equity already built into your home with a second
mortgage, and use that in place of a large down-payment.
Which Lender Should I Go Through?
Always begin with your current lender. They will want to keep
your business, especially if your initial mortgage was relatively
recent (Most lenders do not make large sums of profit until the
mortgage has been running for a few years). The plus side to
this is that many lenders will create spectacular refinancing
packages, especially if you drive a hard bargain. They will
usually be inclined to waive many of the refinancing fees - and
might just waive all of them if you have demonstrated being a
Before you decide to go elsewhere,
make sure you get your current lender to quote a refinancing package
for you. After obtaining more quotes from other lenders, use
the quote from your original lender (if it is lower than the others)
as a bargaining tool. Remember, there are many places where
you can go to refinance - banks, mortgage companies, and credit
unions. But why run around wasting energy. You can go through
Home Equity Loans.org and get four quotes through the Lending Tree
Network without ever leaving the comfort of your
The word on mortgage brokers is that
they do not actually fund loans. They are the middle men who
sort the paperwork while searching for lenders. Of course they
do not search the entire home equity loan market. Rather, they
will most likely go through lenders who they are familiar with and
have done business with in the past.
Keep in mind that finding the lowest
possible home equity loan rate is not the only object of concern.
If you decide to go through a broker, make sure they are fast,
reliable, and honest. Although one never really can know their
brokers character without a doubt, you can definitely inquire local
real estate agents and people you know who have refinanced recently.
They will be more able to give you good references of those brokers
who have proved themselves in the past.
How Should I Compare Home Equity Loans?
First and foremost, compare their annual percentage rates.
Known as the loans APR, this is the percentage amount of your loan
credit that you will have to pay as interest over the length of a
year. It may also include loan fees resulting from discount
points on your mortgage.
It is Federal law for lenders to
quote an APR within three days of a loan application submission.
By comparing APR's you can determine which mortgage will cost you
more money. The bad news is that the APR is quoted under the
assumption you will keep the loan for its full term. If
you refinance or pay off the mortgage ahead of time, your APR will
likely remain - Especially if you have an early-payment clause in
your original mortgage.
Because not every refinancing fee is
included in the APR (depending on the lender), you should inquire
your lender about providing a breakdown of the closing costs.
This way, you can really see just how low your APR quote actually
If you are seriously contemplating an
ARM, play the what-if game and hypothetically create the worst-case
scenario possible. Usually, ARM's come with "payment shock"
clauses, which give limits as to how high APR's and monthly
installments can climb. It is a good idea to do the math
anyways, and see what kind of situation you would be in if your
mortgage hit the highest possible rate. The bottom line is
that before you pick the kind of home equity loan you want to
refinance with, study the refinancing guide here on Home Equity
Loans.org and get informed!
Home Equity Loan Refinancing Guide