What is Equity Line of Credit
A homeowner, if handles proposals with care, HELOC loans can turn out to 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 its worth remembering that not all home-equity credit lines are created equal. If you decide that a HELOC is ideal for you, what features should you look for Below are few 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 fierce. Thats why 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. On the other hand if your lender assesses an application fee, be certain that it is refundable at closing. You can also look elsewhere for your HELOC loan.
2. No appraisal or closing costs The market value of your property is pivotal to determining the amount of your line of credit. Very few of the lenders are willing to use publicly available tax assessment data in lieu of formal appraisals. Rest may absorb appraisal costs to attract customers. Either way, fact remained that 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 Theoretically speaking lenders obviously make their money when you write checks (borrow) on the home-equity line of credit. Majority of lenders make it as hassle-free as possible with free checks and, sometimes, even debit cards. In case if your lender charges fees for the privilege of having a HELOC checking account, look out for another options.
4. No "non-usage" fees On the other side of the coin, a few lenders have started assessing fees to homeowners who take out home-equity line of credit but dont use them enough! Apparently it is worth mentioning in this regard that they dont approve of the notion that a homeowner may want to have a HELOC as an emergency reserve account. It is advisable that you look for a lender that does not charge this type of fee.
5. More often than not variable APR equal to or near the prime rate (adjusted quarterly) In simple terms the only cost involved with a good home eequity line of credit should be interest charged (APR) on the balance borrowed. As is pretty much the case with any loan, the borrowers goal is to get the lowest possible APR. Majority of 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%). It is of utmost significance that you 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 perspective that the periodic and lifetime caps on rate changes are as important as the initial rate.
6. Remember that periodic cap on interest rate changes (the amount that the rate can be changed at one time) Almost 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 main thing 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 dipping the larger and quicker the change; the better for you. But more crucial is the upside risk you face when rates are rising. In that scenario look for a HELOC that adjusts quarterly (rather than monthly) in increments of 0.5% or less. Point to be noted here is that with expectations of rising interest rates, many lenders appear to be eliminating the periodic rate cap feature and raising lifetime caps to legal limits. In case if you have an older HELOC that incorporates relatively low rate ceilings (or if you find one), consider yourself fortunate!
7. Most importantly lifetime cap on rate increases (the amount that the rate can be adjusted over the loan's life) An ideal HELOC is something youll want to keep for a while. However interest rates have been at relatively low levels for a number of years, it wasnt too long ago that a 10% loan was regarded as a bargain! The fact is that interest rates over time can step up dramatically. Thats why youll want to find a HELOC with a lifetime rate cap that you can live with. For that to happen 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 is pivotal According to experts when rates do rise, people often get skittish about their variable-rate debt. A prominent 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). Believe it or not you likely wont get an APR as favorable as a newly issued HEL, but you also wont have appraisal or closing costs to pay if you convert. Though, note that many lenders charge a fee for converting to a fixed rate loan.
9. Interest-only payments allowed It is normally perfect to make regular principal payments on your HELOC balance. Yet fact remained that a job loss or other emergency can make it a challenge to keep payments current. In these scenarios it is tremendous to have the flexibility to lower your HELOC payment as much as possible. This should take place without increasing your loan balance or raising red flags at the credit rating agencies.
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