Do you own a home? Would you like to buy a new RV or refinance high-cost debt? A home equity loan can be a great low-cost borrowing solution. Here are some things to know before you go in search of financing for your next RV, home improvement project or to pay off high-rate debt.
Do Your Homework
Contact several lenders—and be very careful about dealing with a lender who just appears at your door, calls you or sends you mail. Talk with banks, savings and loans, credit unions and other reputable lenders. If you use a mortgage broker, remember they arrange loans but most do not lend directly. Compare their offers with those of other direct lenders.
Be wary of home repair contractors that offer to arrange financing. You should still talk with other lenders to make sure you get the best deal. You may want to have the loan proceeds sent directly to you, not the contractor.
Comparison Shop
Comparing loan plans can help you get a better deal. Whether you begin shopping by reading ads in your local newspapers, searching on the Internet or looking in the phone book, ask lenders to explain the best loan plans they have for you. Beware of loan terms and conditions that may mean higher costs for you. Get answers to key questions to compare loan plans.
Interest Rate and Payments
What are the monthly payments? Ask yourself if you can afford them. What is the annual percentage rate (APR) on the loan? The APR is the cost of credit, expressed as a yearly rate. You can use the APR to compare loans. Be sure to verify if the interest rate changes during the life of the loan. If so, when, how often, and by how much?
Terms of Loan
How many years will you have to repay the loan? Is this a loan or a line of credit? A loan is for a fixed amount of money for a specific period of time; a line of credit is an amount of money you can draw, as you need it. Is there a balloon payment–a large single payment at the end of the loan term after a series of low monthly payments? When the balloon payment is due, you must pay the entire amount.
Points and Fees
What will you have to pay in points and fees? One point equals one percent of the loan amount (one point on a $10,000 loan is $100). Generally, the higher the points, the lower the interest rate. If points and fees are more than five percent of the loan amount, ask why. Traditional financial institutions normally charge between one and three percent of the loan amount in points and fees. Ask about fees for application processing, origination or underwriting, lender or funding, appraisal, document preparation and recording, broker and any other fees that might apply. Ask if any of the fees are refundable if you don’t get the loan. Determine total closing costs.
Credit Insurance
Does the loan include optional credit insurance? You don’t have to accept optional credit insurance to get your loan. If you want it, ask about paying for it monthly instead of financing the premiums as part of your loan.
Prepayment Penalties
What is the penalty if you pay off or refinance the loan early (that is, is there a pre-payment penalty)?
Think Twice before You Sign
Have a knowledgeable friend, relative, attorney or housing counselor review the Good Faith Estimate and other loan papers before you sign the loan contract. Be sure the terms are the same ones you agreed to. For example, a lender should not promise one APR and then—without good reason—increase it at closing.
Refer to the list of questions you’ve written down. Ask where these terms are covered in the loan contract. Ask for an explanation of any dollar amount or term you don’t understand. Don’t let anyone rush you into signing the loan contract. Make sure all promises are put in writing. Get a copy of the documents you signed before you leave the closing.
Don’t sign on the dotted line if the lender:
■ Tells you to falsify information on the loan application (for example, suggests that you write down more income than you really have).
■ Pressures you into applying for a loan for more money than you need, or one that has monthly payments larger than you can afford.
■ Promises one set of terms but gives you another with no good reason for the change.
■ Tells you to sign blank forms or forms that aren’t completely filled in. If an item is supposed to be blank, draw a line through the space and initial it.
■ Pressures you to sign today. A good deal today should be available tomorrow.
Know Your Rights
If you’re using your home as security for a home equity loan (or for a second mortgage loan or a line of credit), federal law gives you three business days after signing the loan papers to cancel the deal—for any reason—without penalty. You must cancel in writing. The lender must return any money you have paid to date.
The interest you pay on a home equity loan may reduce your taxes. Check with your tax advisor or preparer for details.
Learn More About Financing Your RV
