| So, if you must borrow, what are your options? What | | | | doing is trading off a very low payment for reduced |
| is the best way to borrow the money? | | | | equity in their home. |
| Here are three rules of borrowing that I've found to be | | | | If You Can Handle High Payments, Go For the |
| helpful. | | | | Shortest Term |
| 1. Always spend time looking for the lowest interest | | | | This is the corollary of the previous rule. The idea here |
| rate. | | | | is to pay off that renovation loan as quickly as |
| 2. If you need low payments, go for the longest term. | | | | possible. There are many reasons to do so: |
| 3. If you can handle high payments, go for the shortest | | | | - You can borrow the money again for another |
| term. | | | | project. |
| Always Spend Time Looking For the Lowest Interest | | | | - You reestablish your borrowing limits. |
| Rate | | | | - You cut out the extra interest you're being charged |
| This is not the no-brainer is seems to be. Sometimes | | | | for a longer term. |
| it's hard to know which of several loans has the | | | | Keep in mind, however, there can be good reasons for |
| lowest rate. For example, you go to bank A and it | | | | keeping a loan and not paying it off. |
| offers you a three-year loan for 7 percent the first | | | | Get a Loan with Tax-Deductible Interest |
| year and 9 percent for the remaining two years. Bank | | | | Years ago all interest was deductible. Not so today. |
| B offers 8 per¬cent for full three years. Bank C | | | | Interest on cred¬it cards, for example, is not |
| offers 12 percent, but there's no interest charged for | | | | deductible. Interest for personal loans is not deductible. |
| the first six months. Which bank has the lowest | | | | But interest on a real estate loan, up to certain limits, |
| interest rate? | | | | may be deductible. Generally speaking, when you |
| Before you get out your calculator, be aware that you | | | | purchase a home, the interest on the mortgage up to |
| can't really tell from the information given above. You | | | | $1 million may be tax deductible. Further, if you |
| need to know more. For example, is the loan | | | | refinance, the interest on the refinancing up to $100,000 |
| amortized (paid off in equal installments) or | | | | may be deductible. Certain rules apply, so check with |
| interest-only? There's more interest on an interest-only | | | | your accountant. |
| loan because the balance you owe doesn't decline | | | | If you can swing it, it obviously makes far more sense |
| over time. | | | | to borrow on a loan where you can deduct your |
| Lenders are very tricky when presenting information | | | | interest than on one you can't. |
| about their loans. They emphasize the positive of their | | | | Be sure, before you borrow, that you can deduct the |
| product, while tending to overlook the negative points. | | | | interest. Don't relay on the lender's assertions. Some |
| Of course, many people rely on the APR (annual | | | | lenders will say almost anything to get you to borrow |
| percentage rate) to tell them the true costs of | | | | and others may simply not know in your situation. |
| borrowing. Don't. The APR is no longer a reliable | | | | Check with a good accountant or CPA who is familiar |
| measurement. | | | | with your tax situation. |
| The reason is that today creative lenders have come | | | | Know Your True Conditions and Costs of Borrowing |
| up with all sorts of "garbage" fees that are not | | | | Be aware of special loan conditions that may affect |
| covered by the APR. As a result, a loan with a higher | | | | you. For exam¬ple, today many home equity loans |
| APR, but no garbage fees, may actually be cheaper in | | | | contain prepayment clauses. They will typically say |
| the long run than a loan with a low APR and lots of | | | | that if you pay the loan off before three years, you will |
| garbage fees. | | | | owe a substantial penalty, sometimes $500 or more. |
| Here's a simple way to compare loans. When | | | | Also, many home equity loans require that you |
| borrowing money from any lender, ask how much the | | | | personally occupy the property. If you rent it out, you |
| total interest and fees will be for the full length of the | | | | may be violating the conditions of the loan, and the |
| loan. For example, if you're borrowing $10,000 for three | | | | lender could call in the entire amount or refuse to lend |
| years, find out the total interest charged over that time, | | | | you more (in the case of a line of revolving credit). |
| then add in all the fees for getting the loan. This is your | | | | In the case of credit card loans, be aware that the |
| true cost. Now go to the next lender and ask the | | | | interest rate the lender charges is not regulated (with a |
| same thing for the same amount for three years. | | | | very few exceptions in certain states that still retain |
| When you're done, simply compare your total loan | | | | usury laws). A common practice today is to issue |
| costs (the true amount you're being charged). Now | | | | cards with a relatively low interest rate-say, 7 percent. |
| you're comparing apples with apples and can figure | | | | Then the original lender sells your account to another |
| out what your true costs are. | | | | lender that changes the conditions of the account and |
| If You Need Low Payments, Go For the Longest | | | | ups the rate to 20 percent or higher. |
| Term | | | | Also be aware of all the conditions of your loan: which |
| The longer you pay, the lower your payments. This is | | | | ones are cast in stone, which ones can be changed, |
| simple mathematics. If you borrow $10,000 amortized | | | | and which ones are most likely to affect you. |
| at 8 percent of your unpaid balance, your monthly | | | | And, know your true costs. The true interest rate on |
| payments will be $313 for three years, $203 for five | | | | the money you borrow, which we calculated above, |
| years, $121 for 10 years. Of course, at the end of any | | | | may be different from your actual cost for borrowing |
| of those time periods, you will owe zero. | | | | funds. |
| On the other hand, you can pay interest only. In that | | | | For example, you may have $10,000 invested in the |
| case, your monthly payment will be only $67 a month! | | | | stock market earning you 11 percent. If you cash in |
| But you'll continue to owe the full $10,000. | | | | your stocks to pay for a renovation, you lose that 11 |
| Many people opt for low-payment interest-only home | | | | percent you would otherwise get. On the other hand, |
| loans, figuring that price appreciation will cover the | | | | you may be able to get a loan for a true interest rate |
| unpaid balance and it will all come out in the wash | | | | of 8 percent. By keeping your stock and borrowing the |
| when they sell. Maybe so, but what they are actually | | | | money, you're actually making a 3 percent profit. |