If you are a homeowner, you've probably received offers to apply
for a home-equity line of credit (HELOC) loan. Handled with care,
HELOC
loans can be an excellent way to improve financial flexibility,
provide readily available cash reserves for emergencies, or pay for
large expenses (like college tuition or home improvements) that have
irregular payment schedules. But be aware that not all home-equity
credit lines are created equal. If you decide that a HELOC is right
for you, what features should you look for?
Here are ten things that should be at the top of your list:
1.
No application fee (or fee should be refunded at closing -
The HELOC loan 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 loan.
2.
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.
3.
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.
4.
No "non-usage" fees - On the other hand, a few lenders have
started assessing fees to homeowners who take out home-equity credit
lines but don't use them enough! Apparently they don't
approve of the notion that a homeowner may want to have a HELOC as an
emergency "reserve" account. Definitely look for a lender
that does not charge this type of fee.
5.
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).
6.
Periodic cap on interest rate changes (the amount that the rate
can be changed at one time) - Virtually all HELOC loans 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!
7.
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.
8.
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.
9.
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.
10.
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 HELOC loan 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.
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