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Using a credit
line to borrow against the equity in your home has become a popular
source of consumer credit. And lenders are offering these home
equity credit lines in a variety of ways.
You will find
most loans come with variable interest rates, some come with attractive
low introductory rates, and a few come with fixed rates. You also
may find most loans have large one-time upfront fees, others have
closing costs, and some have continuing costs, such as annual
fees. You can find loans with large balloon payments at the end
of the loan, and others with no balloons but with higher monthly
payments.
No one loan
is right for every homeowner. The challenge, then, is to contact
different lenders, compare options, and select the home equity
credit line best tailored to your needs. Debtworking is familiar
with a variety of reputable lenders for both debt consolidation,
home equity loans and home equity lines of credit. For your reference,
here are some of the ones we like:
Be sure to
review the home equity contract carefully before you sign it.
Do not hesitate to ask questions about the terms and conditions
of your financing. To help you do this, you may want to consider
the following questions and to use the checklist at the end of
this brochure. (We apologize that the checklist is not available
on-line. To obtain a copy of the checklist, please request a free
copy of the brochure by contacting: Public Reference, Federal
Trade Commission, Washington, D.C. 20580;. TDD
call.)
Is
a home equity credit line for me?
If
you need to borrow money, home equity lines may be one useful
source of credit. Initially at least, they may provide you with
large amounts of cash at relatively low interest rates. And they
may provide you with certain tax advantages unavailable with other
kinds of loans. (Check with your tax adviser for details.)
At the same
time, home equity lines of credit require you to use your home
as collateral for the loan. This may put your home at risk if
you are late or cannot make your monthly payments. Those loans
with a large final (balloon) payment may lead you to borrow more
money to pay off this debt, or they may put your home in jeopardy
if you cannot qualify for refinancing. And, if you sell your home,
most plans require you to pay off your credit line at that time.
In addition, because home equity loans give you relatively easy
access to cash, you might find you borrow money more freely.
Remember too,
there are other ways to borrow money from a lending institution.
For example, you may want to explore second mortgage installment
loans. Although these plans also place an additional mortgage
on your home, second mortgage money usually is loaned in a lump
sum, rather than in a series of advances made available by writing
checks on an account. Also, second mortgages usually have fixed
interest rates and fixed payment amounts.
You also may
want to explore borrowing from credit lines that do not use your
home as collateral. These are available with your credit cards
or with unsecured credit lines that let you write checks as you
need the money. In addition, you may want to ask about loans for
specific items, such as cars or tuition.
How
much money can I borrow on a home equity credit line?
Depending
on your creditworthiness (your income, credit rating, etc.) and
the amount of your outstanding debt, home equity lenders may let
you borrow up to 85% of the appraised value of your home minus
the amount you still owe on your first mortgage. Ask the lender
about the length of the home equity loan, whether there is a minimum
withdrawal requirement when you open your account, and whether
there are minimum or maximum withdrawal requirements after your
account is opened. Inquire how you gain access to your credit
line -- with checks, credit cards, or both.
Also, find
out if your home equity plan sets a fixed time -- a draw period
-- when you can make withdrawals from your account. Once the draw
period expires, you may be able to renew your credit line. If
you cannot, you will not be permitted to borrow additional funds.
Also, in some plans, you may have to pay your full outstanding
balance. In others, you may be able to repay the balance over
a fixed time.
What
is the interest rate on the home equity loan?
Interest
rates for loans differ, so it pays to check with several lenders
for the lowest rate. Compare the annual percentage rate (APR),
which indicates the cost of credit on a yearly basis. Be aware
that the advertised APR for home equity credit lines is based
on interest alone. For a true comparison of credit costs, compare
other charges, such as points and closing costs, which will add
to the cost of your home equity loan. This is especially important
if you are comparing a home equity credit line with a traditional
installment (or second) mortgage, where the APR includes the total
credit costs for the loan.
In addition,
ask about the type of interest rates available for the home equity
plan. Most home equity credit lines have variable interest rates.
These variable rates may offer lower monthly payments at first,
but during the rest of the repayment period the payments may change
and may be higher. Fixed interest rates, if available, may be
slightly higher initially than variable rates, but fixed rates
offer stable monthly payments over the life of the credit line.
If you are
considering a variable rate, check and compare the terms. Check
the periodic cap, which is the limit on interest rate changes
at one time. Also, check the lifetime cap, which is the limit
on interest rate changes throughout the loan term. Ask the lender
which index is used and how much and how often it can change.
An index (such as the prime rate) is used by lenders to determine
how much to raise or lower interest rates. Also, check the margin,
which is an amount added to the index that determines the interest
you are charged. In addition, inquire whether you can convert
your variable rate loan to a fixed rate at some future time.
Sometimes,
lenders offer a temporarily discounted interest rate -- a rate
that is unusually low and lasts only for an introductory period,
such as six months. During this time, your monthly payments are
lower too. After the introductory period ends, however, your rate
(and payments) increase to the true market level (the index plus
the margin). So, ask if the rate you are offered is "discounted,"
and if so, find out how the rate will be determined at the end
of the discount period and how much larger your payments could
be at that time.
What
are the upfront closing costs?
When
you take out a home equity line of credit, you pay for many of
the same expenses as when you financed your original mortgage.
These include items such as an application fee, title search,
appraisal, attorneys' fees, and points (a percentage of the amount
you borrow). These expenses can add substantially to the cost
of your loan, especially if you ultimately borrow little from
your credit line. You may want to negotiate with lenders to see
if they will pay for some of these expenses.
What
are the continuing costs?
In addition
to upfront closing costs, some lenders require you to pay continuing
fees throughout the life of the loan. These may include an annual
membership or participation fee, which is due whether or not you
use the account, and/or a transaction fee, which is charged each
time you borrow money. These fees add to the overall cost of the
loan.
What
are the repayment terms during the loan?
As you
pay back the loan, your payments may change if your credit line
has a variable interest rate, even if you do not borrow more money
from your account. Find out how often and how much your payments
can change. You also will want to know whether you are paying
back both principal and interest, or interest only. Even if you
are paying back some principal, ask whether your monthly payments
will cover the full amount borrowed or whether you will owe an
additional payment of principal at the end of the loan. In addition,
you may want to ask about penalties for late payments and under
what conditions the lender can consider you in default and demand
immediate full payment.
What
are the repayment terms at the end of the loan?
Ask whether you might owe a large payment at the end
of your loan term. If so, and you are not sure you will be able
to afford the balloon payment, you may want to renegotiate your
repayment terms. When you take out the loan, ask about the conditions
for renewal of the plan or for refinancing the unpaid balance.
Consider asking the lender to agree ahead of time and in writing
to refinance any end-of-loan balance or extend your repayment
time, if necessary.
What
safeguards are built into the loan?
One of the best protections you have is the Federal Truth
in Lending Act, which requires lenders to inform you about the
terms and costs of the plan at the time you are given an application.
Lenders must disclose the APR and payment terms and must inform
you of charges to open or use the account, such as an appraisal,
a credit report, or attorneys' fees. Lenders also must tell you
about any variable-rate feature and give you a brochure describing
the general features of home equity plans.
The Truth
in Lending Act also protects you from changes in the terms of
the account (other than a variable-rate feature) before the plan
is opened. If you decide not to enter into the plan because of
a change in terms, all fees you paid earlier must be returned
to you.
Because your
home is at risk when you open a home equity credit account, you
have three days to cancel the transaction, for any reason. To
cancel, you must inform the lender in writing. Following that,
your credit line must be cancelled and all fees you have paid
must be returned.
Once your
home equity plan is opened, if you pay as agreed, the lender,
in most cases, may not terminate your plan, accelerate payment
of your outstanding balance, or change the terms of your account.
The lender may halt credit advances on your account during any
period in which interest rates exceed the maximum rate cap in
your agreement, if your contract permits this practice.
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