An Equity Line of Credit is a popular source of credit. It uses the equity in your home as collateral and works very much like a credit card. Consumers are able to borrow against a set limit for the life of the loan. Most Equity lines of Credit come with variable interest rates and a few will have a fixed rate. An Equity Line of Credit will have closing costs similar to a mortgage loan, as well as annual fees and possible continuing costs.
As with any loan, you should check with different lenders and compare options. Select the equity line of credit that is best tailored to your needs. Be sure to review the contract carefully and ask questions regarding the terms and conditions. To help you do this, please consider the following considerations:
If you need to borrow money, an equity line of credit may be what you are looking for. Potentially, you could receive a large amount of cash at a relatively low interest rate. There are some risks involved:
- Some Equity Lines of Credit have a balloon payment which is a repayment of the outstanding balance sum at the end of the loan term.
- The continued borrowing against the equity line of credit will increase the payments.
- If you’re late on payments, this could put your home at risk and also your credit report.
- If you are planning to sell your home soon, having a 1st & 2nd mortgage will reduce you equity in your home.
- Having easy access to cash is not always a good thing. This could lead to overspending, which can have a ripple effect.
Your creditworthiness (factors such as income and credit history), outstanding debt and appraised value of your home will determine how much you qualify for. Some home equity lenders may allow you to borrow up to 85% of the appraised value of your home. Some equity lines of credit specify minimum and/or maximum withdrawal requirements along with time periods of withdrawal. Typically you can access the money with check. Some may offer credit or debit card. However, this may require a separate application.
Annual Percentage Rate (APR):
When shopping for an equity line of credit, it pays to contact several lenders. Compare the Annual Percentage Rate (APR), which indicates the cost of credit on a yearly basis. Make sure to compare the closing costs and points associated with the equity line of credit.
Ask about the type of interest rates available. Most home equity credit lines of credit will have variable interest rates, which typically have lower monthly payments in the beginning of the loan and increase in rate over time. Fixed interest rates, if available, are typically slightly higher; however, offer stable monthly payments over the life of the loan.
The closing costs in a home equity line of credit are typically the same fees as your original mortgage loan. These include items such as an application fee, title search, appraisal, and points (fees are based upon the loan amount you borrowed).
If you’re making the monthly payments on your equity line of credit and you have a variable loan, your payments may change. Find out how often and how much your payments can change. You will also want to know how much of you payment goes towards the principle and towards the interest. Ask the representative penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment. Ask whether 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.
Once your home equity plan is opened, if you pay as agreed, the lender, in most cases, may not terminate your loan, accelerate payment of your outstanding balance, or change the terms of your account. The lender may pause 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.
For more information contact Blanca.