If
you think you're ready to tap some of the equity in your home, do your homework
first. The time you spend now could save you heartache (and plenty of dough) in
the future. Take these four steps before signing on the dotted line:
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| Homework assignment | |
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1. Consult your
financial advisers. Financial advisers know which questions to ask to understand
your complete financial picture, including events on the horizon. Starting here
can save both time and money while making the borrowing process less threatening.
Any major financial decision should be weighed with consideration to its tax impact.
Speaking with a tax professional can guide you to your smartest borrowing decision.
2. Comparison shop.
Shopping is an incredibly important but often overlooked step. At the very least,
start with your primary lender. One easy way to find the best deal is to use the
Bankrate home equity
loan rate tables to find rates specific to your area. One bankruptcy researcher
draws a parallel between consumer willingness to "run around to Kmart or Target
to save 50 cents," while the stakes of taking out a home equity loan are much
higher. With these numbers, rates even 0.1 percent to 0.6 percent higher than
the prime rate add up to thousands of dollars worth of additional interest payments.
Be sure to shop. This audio
clip explains what lenders look for. 3.
Understand the terms.
Home equity loan terms may be unfamiliar to
you. What you don't know could cost you your home. Most home equity lines of credit,
known as HELOCs, are variable rate loans. Generally, a HELOC starts with a low
teaser rate, then increases after a set introductory period. Find out the floor
and ceiling rates. The initial rate is almost always at floor, or the lowest allowable
rate, and the only way to go is up. Make sure you do the math and determine whether
you will be able to afford the rate increases. Use the glossary
of the most
commonly used home equity terms to help you understand all the details of
the deals offered. 4.
Know your rights.
The Federal Reserve says you should receive information
in writing about each mortgage or home equity loan program you are interested
in before you pay any fees. Be sure to read all the loan details and ask the lender
or broker to clarify index rates; margins; caps; other ARM features, such as negative
amortization; or anything else you don't understand. After applying for a loan,
you will receive detailed loan information from the lender, including the APR,
a payment schedule and whether the loan has a prepayment penalty. A provision
of the Truth in Lending Act gives you the right to cancel certain real estate
loans within three business days without penalty. It is called the right of rescission.
In home equity loans, you can rescind only when using your principal residence
-- not a vacation or second home -- as collateral.
 | Has home equity funded your dreams
or turned into a nightmare? . |
-- Posted:
May 21, 2007 |
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