What Is the Interest Rate on a Home Equity Loan?
Interest rates for home equity loans can vary from lender to lender.
Always check for the latest prices. Further, you want to compare the
annual percentage rate (APR), which indicates the cost on a yearly
basis. And be aware that the APR for a home equity loan is based on
interest alone and you must add in points and closing costs for a true
comparison. Note that when you compare a home equity credit line
with a traditional installment (or second) mortgage, the APR for the
latter usually includes the total costs for the loan.
If you are considering a variable rate, check and compare the
terms with a fixed rate. Check the periodic cap, or the limit on interest
rate changes at one time. Also, check the lifetime cap, which is
the limit on interest rate changes throughout the loan term.
Further, ask the lender which index (such as the prime rate) is
used to determine how much to raise or lower interest rates, and
how much and how often it can change. And check the margin,
which is an amount added to the index that determines the interest
you are charged. Margins may vary considerably between lenders. In
addition, inquire whether you can convert your variable rate loan to
a fixed rate at some future time.
Sometimes lenders offer a temporarily discounted interest
rate—a rate that is unusually low and lasts for only an introductory
period, such as six months. After the introductory period ends,
however, your rate (and payments) will increase to the true market
level (the index plus the margin). So ask if the rate you are offered
is discounted, and, if so, find out how the rate will be determined at
the end of the discount period and how much larger your payments
could be at that time.