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law, variable-rate loans must have a cap on how high the interest can
climb over the life of the loan. Most variable-rate lines of credit also
have a cap that limits how much, and how often, the interest rate can
change during the course of a year. This cap typically prevents the rate
from jumping more than two percentage points in a year.
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Some plans also
limit how low your interest can fall if rates drop.
The best news is that
the interest on home equity loans is usually tax-deductible for
up to $100,000 on your home's principal mortgage balance.
Of course, the sooner
you pay off the loan, the less it will cost you in interest.
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Tips
- Ask the lender:
- How much can a variable
interest rate go up at one time?
- What is the cap on a
variable rate?
- What is the maximum
monthly payment? The minimum?
- How often can you change
the rate?
- What index do you use
and how high has it risen in the past?
- Is the loan amortized,
or is there a balloon payment? If not fully amortized, how much
is the balloon and when is it due? (If there is a balloon, you don't
want to be surprised when the end of the loan rolls around and there
is a lump sum payment due you hadn't been aware of.)
- Understand that you cannot
compare the annual percentage rate -- the cost of the loan each year,
expressed as a percentage -- of a term second mortgage with a line of
credit. They are calculated differently. The APR for a term equity loan
takes into account the interest rate plus points and other finance charges.
For a line of credit, the APR is based on the periodic interest rate
and does not include points and other costs.
- Electronic payments sometimes
get you a fractional break on interest rates. You usually need to have
your loan from the same financial institution you have a checking or
savings account to do this.
- Before you sign, consult
a tax adviser about deductions on your loan because there are exceptions
to deductibility.
By bankrate.
Back to Bad
credit home loans
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