The most basic piece of knowledge one needs in order to be in control of their finances is the importance of awareness. Many people will go through their lives blissfully ignorant of their own financial details. Why? For one, ignorance is bliss. The more financial trouble you are in, the easier it is to ignore financial details because it keeps stress out of your life. David Bach is professing tips for dealing with home equity and debt, and for his fourth informative piece, he underscores the importance of being aware of how much your debt is costing you.
First, shop around for the best rates (check out Bankrate.com or LowerMyBills.com to compare lenders’ rates). Then, see if your primary mortgage lender can offer you a deal. But make sure you understand how it works.
For instance, is the loan tied to the prime rate? Is it fixed or variable? Variable rates can hurt if rates keep going up. Determine when that variable rate adjusts and what your new payment amount will be when it does.
Read the fine print: Is there an origination fee (even if you don’t use the loan)? Is there a property appraisal or application fee? Will you incur closing costs? Will your payment amount increase if you’re ever late? And finally, are there fees if you pay the loan back early?
When I was in debt and ignorant of that fact, if I didn’t start writing down my credit card and loan balances, the interest rates, and my monthly obligations — and later entered my information into financial software to track my spending and expenses — I never would have gotten myself in a better position. When you’re comparing home equity products with the intent of making decisions about home equity loans and HELOCs, you will not be able to make competent decisions until you understand the details.
You can’t just stop at the interest rate, either; as David Bach mentions, prepayment fees are important as well. If you want to pay your loan off faster than the provided amortization schedule, prepayment fees can take the place of the interest you think you’re saving. It gets worse. The more customers become aware of the “hidden” fees, the companies seemingly find new ways to confuse and distract.
Seven Ways to Be Home Equity Savvy [David Bach]
Updated September 28, 2007 and originally published August 22, 2007.