Home Equity Credit Lines
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.
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
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.
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; (202) 326-2222. TDD call (202) 326-2502.)
home equity credit line for 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.)
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.
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.
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.
money can you borrow on a home equity credit line?
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.
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.
is the interest rate on the home equity loan?
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
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.
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.
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
are the upfront closing costs?
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
are the continuing costs?
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
are the repayment terms during the loan?
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
are the repayment terms at the end of the loan?
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.
safeguards are built into the loan?
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.
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.
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
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.