Home Equity Lines of Credit
When finances are tight, you may consider having home equity lines of credit ( HELOC ) to pull you out of your current credit rut. It may seem like a wise thing to do, but before you even finalize that deal, you must carefully consider the consequences of having the risk of losing your very home if you fail to pay this type of loan. As the word implies, a home equity line of credit is a type of mortgage where your very home serves as your loan’s collateral. Since your home is your basic and most precious asset, using home equity lines of credit have been made by those who need to fund major expenses such as medical bills, education fees, or major home renovations.
In a home equity line of credit, the loan’s interest will be based on a predetermined rate which is variable, depending on the current rate of your home. You can pay minimum monthly interest rate to keep your repayment on time and this can be made in less than five years or more, until all balances are fully paid. Know that there will always be a challenge when it comes to rates and you need to compare your lender’s options before you sign up. You have the right to ask questions, specially on your home equity lines of credit’s terms and conditions. Ask for any special tax credits for this type of loan as well.
Here are 6 Key Factors to Remember in Getting a Home Equity Line of Credit:
1. Most home equity lines of credit make you borrow at a fixed rate which is renewable. Don’t settle for those that are not, which means you won’t be able to borrow more money to renew your credit line once the term ends.
2. The value of your loan will depend on the value of your home, plus your credit score. You can borrow up to 85% of your home’s appraised value and there will be a minimum withdrawal amount required when you open a home equity line of credit.
3. Shop around and compare your loan’s cost of credit per year or the annual percentage rate ( APR ). Include other charges like your closing cost when making a calculation. You need to know what type of interest rate will be applied.
4. If your home equity line of credit uses a variable interest rate, you can expect lower monthly payments which will become higher as your loan matures. Fixed interest rates may give you higher monthly payments without the fear of getting higher interest rates in the future.
5. Compute other costs that will come with your home equity line of credit, such as application fee,
appraisal charges, title searches, legal fees, annual memberships, transaction fees, or service fees from your lender. Gather all data on your upfront charges, as well as closing costs.
6. Know the terms of repayment very well and know if you will be paying an interest-only loan, or the principal plus interest. Ask your lender how much is the minimum monthly payment and what will be the charges for late payment penalties. You also need to know if you will be paying a balloon sum at the end of your loan’s term.
Keep in mind that by the Federal Truth in Lending Act, your lender is obliged to inform you about the cost and terms of your home equity line of credit. You are protected on any changes in the plan, before you even sign a contract with your lender. You have three days, under law, to cancel any transaction , for any reason and this must be done in writing. All fees you have will be returned upon cancellation. When your very home is at stake, don’t get scammed. If you believe you have been a victim of fraud, you may file a complaint with the FTC or Federal Trade Commission at toll-free hotlines: 1-877-FTC-HELP (1-877-382-4357) or TTY: 1-866-653-4261. The FTC files all its complaint in its Consumer Sentinel Network, a secure database used online by law enforcers inside and outside the U.S.
RESOURCES:
FTC. “ Facts for Consumers: Home Equity Credit Lines. “ February 2007. ( Updated April 2009 ).
http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea02.shtm
Investopedia ULC. “ Home Equity Line of Credit – HELOC. “ 2009.
http://www.investopedia.com/terms/h/homeequitylineofcredit.asp
The Federal Reserve Board. “ What is a Home Equity Line of Credit. “ August 2009.
http://www.federalreserve.gov/Pubs/equity/equity_english.htm
