Home Equity Lines of Credit

Almost everyone, who owns a house, has some sort of home equity loan (to get a free quote click here). The reason is clear. A home is great collateral for a loan. The rates on these loans are usually 1% to 2% lower than a normal loan. Typically, lenders will allow you to borrow up to 85% of the appraised home value. Home Equity loans can also provide you with certain tax advantages that are unavailable with other types of loans. For example, you may be able to deduct your interest payments from your taxes. For the specific rules, contact your accountant.

Remember: If you can't make the payments, however, you could lose your home. Do not be pushed into these agreements if you can not pay the interest payments. CONSULT a lawyer or financial advisor. Again, DO NOT BE PRESSURED INTO ANYTHING!

Interest rates vary among these types of loans. The criteria generally used in determining what rate you will get depends on your "creditworthiness", the loan amount, your house value, and the issuer of credit. Like checking and savings accounts or any other type of financing, you should shop around for the best rate you can find.

Note: the rate (APR) quoted to you is based on interest alone. For the total comparison between offers, you must calculate not only the APR but also the other costs and fees involved. A prime example of these costs include the closing costs. Be aware also of any annual fees or membership costs. For example, bank A charges you an 8% APR with no closing costs or fees. Bank B, on the other hand charges you a 7.5% APR with closing costs and other certain fees. By calculating these fees and closing costs into the APR to compute your actual rate, you discover that the 7.5% APR is actually around 9%. Obviously, bank A has the better deal despite the higher quoted APR. To get a free quote click here

Ask the lender about the requirements of the loan as well. You should know the length of the loan but check to see if there is a maximum or minimum withdrawal requirement after your loan has been initiated. There may be a certain time period when you can make withdrawals from this account. There also may be provisions to continue your credit line. This can be useful in times of financial hardship. You then simply have to withdraw money instead of reapplying for a new credit line. You may want to get the lender to agree, in writing, ahead of time to refinance any end-of-loan balance or extend your repayment time, if and when the situation arises.

Check the payment schedule as well. Certain plans start off easy enough but during the latter part of the plan, the payments become increasingly tougher. If you wish to have these payments fixed, the interest rate is probably a little more expensive than a variable rate. Some plans even offer the option to start with a variable rate and switch to a fixed rate down the line. If the plan has a variable rate, read over the maximum amount that an interest rate could change in a given period (periodic cap). The most important thing to remember is to determine which plan would be best suited to your finances. Consider the worst possible scenarios and which plan would make your financial life less stressful.

IMPORTANT: Make sure the rate that you are quoted is not a discounted rate. Under these plans, the rate is significantly increased after a certain time period. This type of plan may be useful for those households that have temporary money needs but DO NOT BE FOOLED into thinking this rate will remain throughout the plan. Any lender, according to the Federal Truth in Lending Act, is obligated to tell you about all of the terms and costs associated with the plan.

Note: If you decide to change your mind and not proceed with the plan because the lender changed your terms, you are owed all monies paid in fees. You also have three days after the account is opened to change your mind before you are bound to the contract. To change your mind, you MUST let the lender know in writing. Again, all of your fees must be returned.

There are other incidental costs to address as well. For example, as when you start a mortgage, there are lawyer's fees, application fees, etc. These expenses can be substantial. Ask the lender if they will share in the cost. ASK WHETHER YOU ARE DEALING WITH A BROKER. Brokers are intermediaries between you and the lender. Usually, if you are dealing with a broker, you must pay an extra fee (their commission).

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