Question from a reader:”I was one of the fortunate people who had a HELOC and I noticed that despite interest rate drops I still am being dinged a lot of money. When I called to ask for help they said to check the terms of my loan. I did and I still don’t understand what is happening.”
My answer is to check your monthly bill and your original contract for verbiage stating that you will be paying a variety of “either/or” amounts including possibly 1% of the total outstanding balance due. It doesn’t make sense financially from a bank’s point of view if they don’t have some mechanism in place to insure that you repay at a realistic rate. You also have to watch out that you are comfortable with the unfavorable situation that you might find yourself in with the low rate but the required minimum of either the finance charge, 1% of the total outstanding due or whatever else your option might be.
With the freezing and thaw of HELOCs (well, there isn’t realy a thaw-a lot of people aren’t getting their HELOCs back), people who were trying to take money out as a cushion are finding that they still are paying a lot of money for the privilege of having cash at their fingertips. It is a judgment call especially since banks have been tight with cash and it may be worth paying extra money in return for having the access to larger sums of money when you need it. That is a personal call.
In your specific case, re-read your original agreement that you signed with your lender and double check your bill that you receive monthly. I have to believe that it is spelled out pretty graphically what the terms are for interest and repayment. It is not uncommon though for people to gloss over those details until they find themselves stuck in a loan and making payments that they didn’t realize were so large.
In general, when you are signing papers for any kind of loan – automobile, credit card, home or boat- read the fine print and if you aren’t sure of something, take the time to ask. Make yourself a cooling off period as well where you can sit down after reading the documentation, think about it and then go back and ask any questions that you need to. Then you can sign the paperwork.
If you have already signed the paperwork and are deep into the loan, you may try to renegotiate or look elsewhere for financing. It isn’t clear when banks are going to start loosening their purse strings (which to me doesn’t make sense since they were bailed out) and get back to their job of lending money.
If you also have been stashing money aside, make sure you can get some sort of interest rate for it even if it is next to nothing. Every little bit of savings helps. It is the incremental changes that over the long haul make a difference and cause you to have large changes!
Let me take a quick second and talk about credit cards here as well. Credit card applications and paperwork show the monthly and annual interest rates in every statement and how they calculate their balances. Some of them are quite hefty and since there isn’t any tax benefit either for having outstanding credit card balances, they should be paid down as soon as possible. The same holds true for loans where no payment is due for up to a year later. You may not have to make a payment till a year from now but you better believe that interest may start accruing from the day you take possession of whatever it is that you are buying. That great deal on the big screen tv for $600 may end up costing you over $1000 two to three years later.
Car loans are pretty straightforward compared to home loans but they still can be misleading. Again, the previous reminders apply no matter what the price of the car. One thing to watch for is when you initially negotiate terms that you try to watch it so you aren’t overpaying for the vehicle in higher interest rates. Another downside for missing payments with car loans is that somebody, sometime will come along with a tow truck and repossess your car from you.
In any event, to my reader, good luck with your specific financial situation.
Kim Isaac Greenblatt