Home equity interest rates can be confusing for some people. In fact, if the wrong type of loan is taken out, homeowners can easily find themselves in financial trouble. With the current housing market mess, it is wise to understand how these interest rates work and how much they will cost you during the life of your loan.
The good news is that interest rates are a very helpful tool when homeowners are shopping for home equity loans. Of the many terms that are associated with home equity loans, APR is one of the most important. APR stands for Annual Percentage Rate.
It should be understood that you cannot compare the APR between a home equity line of credit and a home equity loan. These are two different types of loans and they behave differently.
Homeowners should also understand that an introductory rate is often used by lenders to get new business. If your loan has an introductory rate make sure you understand what the true rate will be once the first phase or introductory phase is over.
There is a difference between the standard interest rate and the annual percentage rate. The interest rate for home equity loans does not correctly tell you the true cost of the loan because it does not account for added costs such as points and fees. The APR is far more helpful when you are comparing two home equity loans because it accurately reflects the cost of credit expressed as a yearly rate. It will also include the interest rate and all fees and points that must be paid.
When you are trying to compare APR’s between different loans, make sure that the terms and conditions of the loans are the same. Differences in the terms and conditions will affect the APR. As an example, if one of the loans that you are looking at has a longer payment term, a balloon payment, and some type of pre-payment penalty, it is not meaningful to compare its APR to another home equity loan that does not have those conditions.
Another confusing aspect of home equity loans is the difference between home equity loans and lines of credit. Consumers will do well to compare APR’s on home equity loans, but they should understand that they cannot compare this to lines of credit loans. This is because the annual percentage rate for a home equity loan takes into account the interest rate and all fees paid within the loan, while the APR for a home equity line of credit only takes into account the interest rate. In other words, the fees in a line of credit are not factored into the APR. To avoid confusion, consumers should only compare like to like; the APR of a home equity credit line loan should only be compared to the APR of another home equity line of credit that contains similar terms.
As mentioned above, home equity lines of credit may offer an introductory interest rate to get your attention. These introductory rates are also called discounted rates or teaser rates. It is important to know in advance how long the rate will apply and how much additional interest you will have to pay once it is over. In some cases, the added interest can be significant, in which case you may want to continue shopping.