Calculating the Cost of Home Equity Loans

By Karen Lawson
LoanPage.com Columnist

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You've got a mountain of bills, have a chance to make a great investment, or your kitchen needs updating--and there's no cash to do it. How do you choose a home equity loan? How do you compare the costs of your current consumer debt with the cost of home equity loans? Here are some tips for home equity loan shopping.

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APR: The Cost of Credit in a Nutshell

Federal law requires lenders (banks, credit unions, mortgage lenders credit card companies, etc.) to provide the total cost of financing calculated as a percentage rate on a yearly basis. This amount, or annual percentage rate (APR) must be clearly stated on any credit agreements, mortgage documents and other loans. It's important to understand that the APR is not the same as the stated interest rate on credit cards and loans. The APR includes the interest rate and all additional fees and charges, including annual fees, late charges, and over limit fees. Mortgage loan costs can include title charges, document fees, recording fees, appraisal, and lender charges. Home equity loans are secured by your home and are considered mortgage loans.

Home Equity Loan or Line of Credit?

A home equity loan is made for a specific amount, and requires regular scheduled payments for a set number of years. Your payment can vary if your home equity loan carries (as they often do) an adjustable interest rate. It's important to know exactly when and how much your payments can adjust. A home equity loan can be a good choice if you know exactly how much you need to borrow. A home equity line of credit is an open credit line. You don't make payments unless you access the credit line. This kind of loan can be useful if you are remodeling your home and will be paying for services and materials over time. You can "pay as you go" with a home equity line of credit.

About the Author
Karen Lawson is a freelance writer with extensive experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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