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Home Equity Borrowing Tips And Terms
There are some things to consider when you shop for a Home Equity Loan or Credit Line:
If you select a Home Equity Credit Line with a Variable Rate of interest, you should also consider these factors:
The margin is the difference between the interest rate of the index your Adjustable Rate Mortgage (ARM) is pegged to and the amount of interest you pay. The higher the margin, the more you pay.
Payment limits protect you. They limit the dollar amount your payment can increase from one adjustment to the next. The payment limit helps ensure that you won't be hit too hard by a sudden leap in interest. The tighter your budget, the more you want a low payment limit.
This is the lowest the interest rate can go. Floors protect the bank by guaranteeing them a minimum return.
If the index your ARM is pegged to is at 3%, your interest will be a few points higher and will change when that index does. The current rate for one-year Treasury securities is the index most banks peg their ARM to, but other indexes are also used. A low index doesn't always mean a low interest rate, because the interest rate also depends on the banks' margin between the index and rated charged to you.
Interest Rate Trend
Research interest rates over the past two years. If they have been going up, you'll probably have higher payments in the near future. If they are going down, your payments should also decrease.
A short adjustment period means you start paying more interest as soon as the rates rise. The longer the adjustment period, the longer you'll continue to pay at a lower rate, which saves you money every month. One year is standard for most ARM's. Beware of shorter periods.
These are the highest rates the interest can reach with each adjustment and over the life of the mortgage. Caps protect you from paying sky-high interest. Look for a low cap. Two points per year and six points for the life of the loan is standard. And make sure the caps apply to all the adjustments.
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