10 Things to Look for in a Home-Equity Line of Credit
- No application fee (or fee should be refunded at closing)
- The HELOC market is very competitive. Some lenders may
charge a fee to help cover their costs of processing your
HELOC application and to ensure applications are received
only from seriously interested homeowners. If your lender
assesses an application fee, be certain that it is
refundable at closing. Otherwise, look elsewhere for your
HELOC.
- No appraisal or closing costs - The market
value of your property is key to determining the amount
of your credit line. Some lenders are willing to use
publicly available tax assessment data in lieu of formal
appraisals. Others may absorb appraisal costs to attract
customers. Either way, there are enough no-cost options
available that you should not have to settle for HELOC
lender that charges appraisal costs or any other closing
costs.
- No account maintenance or check-writing fees - Lenders
obviously make their money when you write checks (borrow)
on the home equity credit line. Most lenders make it as
hassle-free as possible with free checks and, sometimes,
even debit cards. If your lender charges fees for the
privilege of having a HELOC checking account, look
elsewhere.
- No "non-usage" fees - The market value of your
property is key to determining the amount of your credit
line. Some lenders are willing to use publicly available
tax assessment data in lieu of formal appraisals. Others
may absorb appraisal costs to attract customers. Either
way, there are enough no-cost options available that you
should not have to settle for HELOC lender that charges
appraisal costs or any other closing costs.
- Variable APR equal to or near the prime rate (adjusted
quarterly) - The only cost involved with a good home
equity credit line should be interest charged (APR) on
the balance borrowed. As with any loan, the borrower's
goal is to get the lowest possible APR. Most lenders use
the "prime rate" as published in the Wall
Street Journal (or other publication) as a base index and
charge you an APR equal to prime plus or minus a marginal
percentage (e.g. 0.25%). Search for the best rate
available, but be aware of low "teaser" rates
that may suddenly change after a brief introductory
period or be accompanied by special fees. Also, keep in
mind that the periodic and lifetime caps on rate changes
are as important as the initial rate (see below).
- Periodic cap on interest rate changes (the amount that
the rate can be changed at one time) - Virtually all
HELOC's are variable rate loans meaning that the initial
interest rate (APR) will change at some point as surely
as the weather. A key is to understand how often the rate
can adjust and how much the rate can be adjusted at one
time. Of course, when rates are falling the larger and
faster the change, the better for you. But more important
is the upside risk you face when rates are rising. Look
for a HELOC that adjusts quarterly (rather than monthly)
in increments of 0.5% or less.
Note: with expectations of rising
interest rates, many lenders appear to be eliminating the
periodic rate cap feature and raising lifetime caps to
legal limits. If you have an older HELOC that
incorporates relatively low rate ceilings (or if you find
one), consider yourself fortunate!
- Lifetime cap on rate increases (the amount that
the rate can be adjusted over the loan's life) - A good
HELOC is something you'll want to keep for awhile.
Although interest rates have been at relatively low
levels for a number of years, it wasn't too long ago that
a 10% loan was regarded as a bargain! The point is that
interest rates over time can rise dramatically. You'll
want to find a HELOC with a lifetime rate cap that you
can live with. Ask your loan officer to clearly spell out
the "worst case" scenario for rate increases
for the HELOC you are applying for.
- Ability to convert to a fixed rate loan - When rates do
rise, people often get skittish about their variable-rate
debt. A useful feature to look for in a HELOC is the
ability to convert the line of credit to a standard
fixed-rate, fixed-term home equity loan (HEL). You likely
won't get an APR as favorable as a newly issued HEL, but
you also won't have appraisal or closing costs to pay if
you convert. However, note that many lenders charge a fee
for converting to a fixed rate loan.
- Interest-only payments allowed - It is usually best to
make regular principal payments on your HELOC balance.
Yet a job loss or other emergency can make it a challenge
to keep payments current. In these situations it is nice
to have the flexibility to lower your HELOC payment as
much as possible without increasing your loan balance or
raising red flags at the credit rating agencies.
- Unrestricted ability to repay principal without penalty -
On the other hand, you also want the flexibility to pay
down principal on the loan when you choose. You may get a
bonus from your job that you want to apply to the loan or
you may find a 0% balance transfer offer that is worth
taking advantage of. In any case, a key component of a
good HELOC is the unfettered ability to repay principal.
Shop around and you will be able to find a home equity line of
credit with many (if not all) of these features. Keep in mind
that your bank is not the only game in town. Credit card
companies, mortgage bankers and brokerage firms have all entered
the market and offer competing products. Credit unions typically
offer excellent terms and should not be overlooked. Also, there
are many reputable on-line sources that have lower overhead costs
and may be able to offer better terms than the local bank.
About The Author
Tim Paul has more than 25 years executive
financial management experience.
His recent area
of focus has been to develop and catalog proven strategies for
financially savvy persons to get the most from their home equity
credit lines. His website is http://www.sagetips.com
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The Homeowner Insurance Quote and Information Center
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