Amount you can borrow

The amount you can borrow on a home equity lone is determined by your LTV ratio, or loan-to-value ratio. The LTV ratio is determined by the amount you owe on both your first mortgage and how much you would like to borrow for your home equity loan divided by the fair market value of your property. If your LTV ratio is 80% or less, lenders are more than happy to lend you the amount you would like, though the other terms have to be settled. For example, if your first mortgage's outstanding amount is $50,000 and you would like to take out a $30,000 home equity loan, your property's fair market value has to be $100,000 ($50,000 + $30,000 / $100,000 = .8 or 80%) or more if you would like favorable terms on your home equity loan. If your LTV score is between 80% and 90%, there are still lenders that will loan to you, but your home equity loan terms become less negotiable. Some lenders will loan you up to 125% of your LTV ratio, but this becomes dangerous and risky ground for you. When you take out a home equity loan, you are basically taking out a lien against your property. If you take out a loan that has you owing more than your property is worth between your first mortgage and you home equity loan, your loan becomes high risk. The rest of your loan terms can become very unfavorable from high interest rates to large fees and closing costs. If you find a lender that offers you a loan of more than 125% of your LTV ratio, you should not have any dealings with them.

Payback Period

The payback period on your home equity loan is determined by the type of home equity loan you want. A standard home equity loan is where you borrow a set amount as a lump sum then pay if back over time. It generally has a payback period of three to fifteen years. This is shorter payback period than a primary mortgage, which has a payback period of fifteen to thirty years, but a longer payback period than most loans available. You should choose the shortest possible payback period that you can afford the monthly payments for as you will save money in the long run by not taking so much time to pay.

A home equity line of credit is where you can borrow up to a specified amount, pay it back, then borrow the money again for a specific amount of time. The amount of time your line of credit is open is determined by you and your lender as each lender offers different payback periods for this type of home equity loan. This type of loan can be nice as you can use it like a credit card, but when the payback period is ended, you will be responsible to pay back everything you owe at that time or re-finance your loan.

Interest

Comparing interest rates or the APR on your home equity loan can be very useful when deciding what lender to apply with. One thing to remember is that you cannot compare the APR of a standard home equity loan to the APR of a home equity line of credit. The reason for this is that the APR on a standard home equity loan takes into account the interest rate and all the fees paid whereas a home equity line of credit APR only takes into account the interest rate as the fees will vary over the life of the loan depending on how much you actually borrow and how quickly you pay it back. Also take into account when comparing loans that the other terms of the loan must be similar like the payback period and fees paid to really get a good comparison of loans.

The typical interest rate for a standard home equity loan is between 5% and 9%, or one percent over the prime mortgage interest rate. Some lenders will give you a much lower introductory rate, then after the introductory period is over charge you an interest rate much higher than is typical to make up the difference. Be sure you are aware whether the interest rate you sign up for is an introductory rate, or if it will continue through the life of the loan, and if it is introductory, find out how long it will last and what your interest rate will be after it is over. You could pay a lot more with an introductory rate, then a fixed rate over the life of the loan, than if you have a lower fixed rate to begin with. While introductory rates can be nice, they aren't all they're chalked up to be.

Fees and Closing Costs

Most standard home equity loans have fees and closing costs that can add to the amount you pay for your loan. The fees and closing costs you'll pay are similar to the fees and closing costs you'll pay when purchasing a home. They can include:

• Property appraisal
• Loan application fees
• Property title search fees
• Attorney or title agent fees
• Document preparation fees
• Origination fees
• And amortization fees

Home equity lines of credit can also have fees attached to them. Common fees included on a home equity line of credit include:

• Annual maintenance charges
• Transaction fees each time you use the account
• Processing fees each time you make a payment on the account
• Inactivity fees if you don't use the account

You may get a minimal break on the fees if you automate payments, or even a break on the interest rate. Be sure to find out what you will be responsible for paying and when before you sign the loan documents.

Balloon Payments

When you have a standard home equity loan each payment comprises of an amount toward the principal and an amount toward the interest. Gradually more and more of what you pay goes toward the principal to pay it off. At the end of the term, the loan is paid off. But sometimes lenders don't work your loan that way. Sometimes they amortize the payments so there is still a large lump sum of outstanding debt that is due at the end of the term. That lump sum is called a balloon payment and unless you can make it at that time, you could default on your loan and loose your home. Although a balloon payment isn't typical in a standard home equity loan, it is more frequent with a home equity line of credit. The standard home equity loans that end in a balloon payment are generally written that way to lower the monthly payment throughout the life of the loan for the borrower, but this puts immense financial pressure on the borrower when the payback period is over. Most people will refinance into another home equity loan in order to make the balloon payment, but this can be very costly and you start paying interest again on an amount you've already paid all the interest on. Avoid balloon payments if you can and steer clear of loans that include a balloon payment in their terms.

Penalties for Early Payback or Late Payment

Some lenders will include an early payback penalty if you pay your home equity loan back within a certain amount of time of taking out the loan. The time varies from one to six years, or the early payback penalty could apply through the entire life of the loan. The standard penalty is 10% of the loan's value, so be aware before you sign a loan agreement if early payback penalties apply and for how long.

Late payment penalties vary from lender to lender, but if you miss or are late on a payment you can expect some sort of penalty. The late payment penalty you want to avoid signing for is an increase in interest as it affects the remaining amount you have left on the loan. If the payment penalty comes early on within the life of the loan, you could be paying thousands more in interest by the time you are finished than you originally agreed to.