Shopping for a Home Equity Loan
Home Equity Lines of Credit
A home equity line of credit works a lot like a credit card that
is guaranteed by your home. You have a limit or a maximum amount
that you can borrow against as you need it. Your payments depend
on the amount of money you use and a variable interest rate.
Home equity lines of credit often offer an introductory interest
rate. The introductory rate is a very low interest rate that is
offered for a short period at the start of a loan. After the introductory
period, your interest rate will be several percentage points higher.
The interest rate you pay on a home equity line of credit is calculated
using an underlying index and then adding a margin rate to it. A
common index that is used is the prime rate . The margin that you
pay is a certain number of percentage points above the index rate.
For example, if the current prime rate is 5% and the margin is 1%,
you are paying a 6% interest rate on your home equity line of credit.
The interest rate on a home equity line of credit is usually a
variable rate although fixed interest rates can be negotiated with
some lenders. Some lenders may even allow you to convert from a
variable interest rate to a fixed rate during the loan term or convert
all or part of your home equity line of credit to a term loan. If
this option interests you, ask the lender if this is available and
ask about any costs associated with this option.
In a variable rate loan, the way that the interest rate changes
is governed by the periodic cap and the lifetime cap. The periodic
cap is the limit on interest rate changes at one time. The lifetime
cap is the limit on interest rate changes throughout the loan term.
The life span of a home equity line of credit is called a draw
period - this is the period of time in which you can access funds.
When you have borrowed money from your home equity line of credit,
your monthly payments will vary with the variable interest rate
and the total borrowed amount referred to as the outstanding balance.
You can pay the outstanding balance in full or you can make a minimum
payment on the balance. You should be aware that some plans may
require that you keep a minimum amount outstanding - ask if your
plan does.
If you have an outstanding balance at the end of the draw period,
your home equity credit line may require you to pay the outstanding
balance in full - this is referred to as a 'balloon' payment. You
may have the option of repaying the outstanding balance in payments
over a fixed period of time. This second option in effect takes
the outstanding balance of a home equity line of credit and turns
it in to a term loan. You must inquire about what happens to outstanding
debt at the end of the life of a home equity line of credit before
you sign loan documents to close the deal.
Home equity lines of credit can be structured in different ways.
Here are some features that you should be aware of. Home equity
lines of credit can require you to take an initial amount out when
the credit line is opened . Your credit line may apply a transaction
fee each time you use money from it and you may be subject to a
minimum or maximum withdrawal amount each time money is used. Some
lenders may waive closing costs if you keep the minimum withdrawal
amount outstanding for a period of say six months. When the draw
period expires, you may or may not be able to renew your credit
line.
Continuing costs, also called annual membership or participation
fees, are annual fees are charged to maintain the home equity line
of credit. Continuing costs are applied whether or not you use your
account. Inactivity fees are fees that are charged if the account
is inactive over a certain period of time. You may be charged continuing
costs and/or inactivity fees.
As with home equity term loans, if you sell your home, you will
be required to pay off your home equity line of credit in full.
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