South Florida Mortgages and South Florida Home Loans
Home Equity Line of Credit - HELOC
South Florida Mortgages and South Florida Home Loans
Home Equity Line of Credit - HELOC
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.
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; (202) 326-2222. TDD call (202) 326-2502.)
Is a home equity credit line for you?
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 you 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 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.
