Lenders offering Home Equity Credit Lines often allow consumers this type of credit in a variety of ways. It has been a popular source of credit for consumers that wish to borrow against the equity built up in their home. Most of these type of loans often come with variable interest rates, and an attractive low interest rate and some also have a fixed rate. Their are some loans that have a large one time up front fees and others have closing costs and yet others have continued costs in the form of annual fees. You will also find loans with large balloon payments at the end of the loan term or others with no balloon payment but a higher monthly payments. The challenge in selecting this type of financing, is to compare options between lenders and select the Home Equity Line that is best for you.
Always review a Home Equity Line of Credit contract before you sign it and never hesitate to ask about the terms and conditions of the contract. Using your home as collateral to provide a large lump sum amount of cash at relatively low interest rates may seem attractive, but it may put your home at risk if you miss a payment or can not make your payments. Loans that require a large final payment (known as balloon payments) may also lead you to borrow more money and can also put your home at risk if you can not qualify for further refinancing. If you decide to sell your home, most loans require that you pay off your credit line. Since home equity loans can give you relatively easy cash, you may find that you borrow money more freely. Before you consider this type of loan, consider if there is other ways to borrow from a lending institution such as second mortgage installment loans. Second mortgages usually is loaned as a lump sum instead in a series of advances made by writing checks on your account. Second Mortgages often have fixed interest rates and fixed monthly payments. It is also possible to borrow from credit lines that do not use you house as collateral and may be available using your credit cards or unsecured lines of credit.
Interest Rates, Time Periods and Costs associated with Home Equity Lines of Credit
Since the interest rates differ between lenders, it is important to compare with several lenders for the lowest interest rate. When making a comparison of the credit costs, compare other costs such as points and closing costs since they will be added to the cost of your home equity loan. Be aware that the annual percentage rate that is advertised is based on interest alone for home equity lines. The amount you can borrow is determined by your credit rating, income and outstanding debt and it may be possible to borrow up to 85% of the appraised value of your home minus the amount that you still owe on your mortgage. Other questions to ask is the length of time of the home equity loan, minimum withdrawal requirements to open an account and whether is minimum or maximum width drawl requirement after you open your account. You should also ask how you access your credit line either by checks, credit card or both.
It is important to find out if there is a fixed time that you can make withdrawals from your account because if it expires you may be able to renew your credit line. If not, you may not be permitted to borrow additional funds. In some loans you may be required to repay the full outstanding balance while others that allow you repay the balance over a fixed time period. Since most home equity lines of credit have variable interest rates, check the terms and conditions between lenders. There may also be a periodic cap which places a limit on the interest rate changes at one time and also a lifetime cap which limits the interest rate changes over the long term of the loan. An index used by lenders (such as the prime rate) determines how much to raise or lower the interest rate and you should ask the lender what index is used and how often it changes through out the loan term. In addition, inquire if you can convert your variable rate to fixed rate at some time in the future. You will also find that some lenders offer a temporary interest for an introductory period such as six months. During this time period, your monthly payments are low, after the introductory period, however, your interest rate and payments increase to the true market level which is the index plus the margin. So if the interest rate is offered as 'discounted' , find out the rate after the discounted period and how much larger the payments are at that time.
You may find that the costs and expenses are the same as when you originally financed your first mortgage. It usually includes items such as application fees, title search, appraisal, attorney's fees, and points (a percentage of the amount you borrow). You may want to negotiate with lenders to see if they will pay for these expenses since they can add substantially to the cost of your loan especially if you borrow a small amount from your credit line. In addition to up front costs, there maybe continue fees through the duration of the loan. They may include a participation fee or annual membership fee and is due whether you use your account and transaction fees which is charged each time you borrow money and these fees add to the cost of the loan.
Repayment Terms and Conditions
If you loan has a variable interest rate, your payments may change even if you do not borrow money from your account. It is important here to find out how much your payment will change and how often. You will also want to know if you are paying principal, principal and interest or only interest. Even if you are paying some principal, ask whether your payments cover the entire amount borrowed or whether you will have to make another payment to cover the principal at the end of the loan term. Also examine if you have late penalities and under what conditions that your lender considers the loan to be default and you must pay back the entire amount of the loan. In the event of a balloon payment and you are not sure if you can repay it, you may want to renegotiate the repayment terms. Prior to taking out the loan, ask about conditions to renew the loan or for refinancing the unpaid balance. See if the lender can agree ahead of time to refinance any end of loan balance or extend your payment, if necessary.
Some of the best protections you have is the Federal Truth in Lending Act, which requires lenders to disclose all the terms and costs of the loan at the time of application. Lenders must inform you of the Annual Percentage Rate (APR), payment terms and must inform you of any charges for opening an account, use the account, appraisals fees, credit report fees or attorney's fees. Lenders must also disclose any variable rate feature and give you information describing general features of Home Equity Credit Lines. The truth in Lending Act also protects you from any changes in the terms of the account before the credit line is opened. If you decide not to enter into the loan because a change in terms, all fees must be paid back to you. Because you're home may be at risk when you open a Home Equity Credit Account, you have three days in which to cancel the transaction, for any reason. In order to cancel, you must inform the lender in writing, After that, the credit line must be cancelled and all fees paid back to you. When your home equity loan is opened, if you pay the lender as agreed, you may not terminate your loan, accelerate payment of your outstanding balance or change the terms of your account. If your contract permits this practice, the lender may stop credit advances on your account during any period in which interest rates exceed the maximum rate cap in your agreement.
GoApply.com is the best in Free Home Equity Line of Credit Quotes giving you Low interest rates for Funding home improvement projects or Cash when you need it! Up to 4 Free Quotes. Get started today.
The Difference between Home Equity Loans and Home Equity Lines of Credit (HELOC)
The Home Equity Line of Credit works much like a credit card whereas a Home Equity Loan is an additional second mortgage. A Home Equity Line of Credit allows the home owner to get cash when they need it up to the limit and only pay interest on the outstanding balance and a Home Equity Loan gives the homeowner a lump sum amount. A Home Equity Line of Credit is more advantageous when the money is required is ongoing such as a home renovation. The HELOC lasts as long the home is owned and it is usually open-ended unlike a Home Equity Loan. The biggest factor in choosing a Home Equity Loan or HELOC is the monthly payment. A HELOC usually has a variable interest rate and when the interest rate goes up, so does the monthly payment where Home Equity Loans have a fixed interest rate and stay at the same payment through the term of the loan.
HELOC's are usually tied in with the prime rate including some margin and a lifetime cap on rate movements. Some may also have introductory rates. Here's an example on how you can compare the Home Equity Line of Credit rate with your credit card rate.
If you know your tax bracket is 40% and the interest rate on the credit line is 9%, your effective rate is: 9% X (1-0.4) = 5.4%. So, you can compare this rate with the credit cards.
