10 Things to Look for in a Home-Equity Line of Credit

If you are a homeowner, you've probably received offers to apply for a home equity line of credit (HELOC). Handled with care, home equity credit lines 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 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.

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 - 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.

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's 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 home equity line of credit 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.

About The Author

Tim Paul has more than 25 years executive financial management experience. His recent area of focus has been to develop and catalog proven strategies for financially savvy persons to get the most from their home equity credit lines. His website is www.sagetips.com.

mail@sagetips.com

---

Applying Online For A Home Loan Can Give You an Instant Approval

"Instant Approval For Home Loans" is a common refrain for... Read More

Home Owner Loans Explained

How To Release Equity Locked Up In Your Home For... Read More

Adjustable Rate Basics

An adjustable rate loan, most simply stated, means that your... Read More

Finding the Best Mortgage Lender Online

Finding the best mortgage lender online is simply a matter... Read More

Private Mortgage Insurance (PMI)

If your down payment on a home is less than... Read More

Home Equity Lines of Credit Vs. Other Conventional Loans

When it comes to getting money, you have two basic... Read More

How to Find the Best Home Improvement Loan

If you're looking for the best home improvement loan for... Read More

What is an Offset Mortgage?

An offset mortgage is very similar to a current account... Read More

Essence of Self Certified Mortgages

Your search for a mortgage isn't leading results.Check for any... Read More

Refinancing Your Home - Is the Time Right?

Refinancing your home is a major decision not to be... Read More

Getting the Best Homeowner Loan for Your Money

With so many lenders out there, it can be hard... Read More

A Guide to Getting a Bad Credit Remortgage

There are several reasons why you might be in the... Read More

Sub-Prime Mortgage Company - 4 Signs of a Predatory Sub-Prime Lender

If you have bad credit and are looking to get... Read More

Sub-Prime Mortgage Loans - Things You Should Know About Sub-Prime Mortgages

Sub-prime mortgages are not that much different from average mortgages.... Read More

Flexible Mortgage Guide

Here is a useful flexible mortgage guide. Flexible mortgages are... Read More

Kippers or Red Herrings?

Recent news has made much of parents stretching their finances... Read More

Option ARM Mortgage Loan - Is This Really for You?

What happened to the days of a 15 or 30... Read More

How To Turn Disadvantages Of A Reverse Mortgage To Your Advantage

When it comes to a reverse mortgage, wise consumers weigh... Read More

What is an Interest Only Mortgage?

An Interest Only Mortgage is one where the repayments are... Read More

A Simple Way to Save Thousands on Your Mortgage Charges

How many times do you check you restaurant bill? If... Read More

Mortgage Info You Can Actually Understand!

This is a great time to Refinance Your Home or... Read More

Bad Credit Mortgage Loans Online - How Your FICO Credit Score Can Affect Your Loan Approval

When applying for a mortgage loan when you have a... Read More

Are You Ready for a 40-year Mortgage?

Real estate prices have been increasing steadily over the last... Read More

How To Get a Mortgage If Youre Self-Employed

If you are self-employed, work on a contract basis, or... Read More

The Mortgage Loan Application Online - Save Time & Money By Applying On The Internet

"You can save time and money by applying for a... Read More

Home Buying ? What Can You Afford?

Okay, you've decided to buy a home and are trying... Read More

First-time House Buyers: to Buy or Not to Buy; that is the Question

Buying your first house is always a difficult time. There... Read More

6 Things to Consider Before Refinancing

Perhaps you're a homeowner in need of some quick cash.Maybe... Read More

No Deposit Home Loans

A few years ago, many of us would have had... Read More

6 Helpful Mortgage Tips

Here are some mortgage tips that can help you obtain... Read More

Guide to Home Equity Loans

Here is a useful guide to home equity loans. A... Read More

Bad Credit Home Financing - Buy a House Even With Poor Credit

Sub prime lenders come in two groups: reasonable and unreasonable.... Read More

Bad Credit? Qualify Yourself For A Zero Down Mortgage Loan

I decided to write this article today after closing a... Read More