Getting the Best Interest Deal on a Home Equity Loan

Consolidating outstanding debt, making property improvements, covering catastrophic medical costs, and any number of other reasons can cause a home owner to seek a home equity loan. Getting the best interest rate can save hundreds, even thousands, of dollars over the term of the loan. Here is a primer on home equity loans to get you started.Home Equity Loan DefinedA home equity loan is a financial instrument wherein a home owner borrows against the worth of a home. The amount is determined by how much is still owed, if anything, and the current market value of the property. Sometimes these loans are called borrowing against property or a second mortgage. The funds are made available to the borrower as cash, payment of outstanding bills, a line of credit, or even as collateral for other real estate.Latest InformationNot too long ago, these loans were offered by banks, credit unions, savings and loans, and other local brick and mortar financial institutions. With the advent of the internet, many home equity loans are available from large private or commercial lenders and the competition is stiff. These non-traditional lenders may specialize in second mortgages or they can be fronts for the more traditional financial institutions.Interest Rate FactorsAny number of factors affect the interest rate that will charged on home equity loans. The credit scores of the home owner is among the primary. Also, the collateral that has accumulated on the home is also a consideration. Often lending institutions will place a cap on loan to value ratios for second mortgages. The size of the loan and its term are also main considerations.Loan TermsThe maturity of the loan, the length of time allotted for repayment, is often referred to as the term. Depending on the size of the loan and other factors, these can range in the 25 to 30 year brackets, or be as small as two or three years. When arranging terms, the lender will work with the borrower so that payments are affordable.Variable Rate vs. Fixed RateBecause a fixed interest rate is affixed at the beginning of the loan and remains constant throughout the term, it tends to be somewhat higher than variable rate loans. However, variable interest rates can adjust to the interest rates charged in the fluctuating financial markets (prime lending rates) and may go up or down over the term of a loan. This can sometimes put a kink in the budget of the borrower.Spending Money to Make MoneyWhen a home owner is confronted with the need for a major cash injection, these home equity loan is the usual vehicle. Perhaps major improvements on the property itself are warranted to increase its value. Maybe college expenses are in the offing. Perhaps catastrophic medical bills are looming. Credit cards charge very high interest rates, some home owners use the loan to settle those debts at a much lower rate.Before embarking on a home equity loan plan, make sure it fits well with your perceived long-term financial goals. Of course, the lower the rate you get the better off you are. Folks should realize that often a home equity loan can save themselves a great deal in interest and savings over the term of the loan.