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Apply Online for a Home Equity Loan -
Using a credit line to
borrow against the equity in your home has become a popular source of
consumer credit. And lenders are offering these home equity credit lines
in a variety of ways.
You will find most loans come with variable interest rates, some come with
attractive low introductory rates, and a few come with fixed rates. You
also may find most loans have large one-time upfront fees, others have
closing costs, and some have continuing costs, such as annual fees. You
can find loans with large balloon payments at the end of the loan, and
others with no balloons but with higher monthly payments.
No one loan is right for every homeowner. The challenge, then, is to
contact different lenders, compare options, and select the home equity
credit line best tailored to your needs.
Be sure to review the home equity contract carefully before
you sign it. Do not hesitate to ask questions about the terms and
conditions of your financing. To help you do this, you may want to
consider the following questions and to use the checklist at the end of
this brochure. (We apologize that the checklist is not available on-line.
To obtain a copy of the checklist, please request a free copy of the
brochure by contacting: Public Reference, Federal Trade Commission,
Washington, D.C. 20580; (202) 326-2222. TDD call (202) 326-2502.)
Is a home equity credit line for you?
If you need to borrow money, home equity lines may
be one useful source of credit. Initially at least, they may provide you
with large amounts of cash at relatively low interest rates. And they may
provide you with certain tax advantages unavailable with other kinds of
loans. (Check with your tax adviser for details.)
At the same time, home equity lines of credit require you to use your home
as collateral for the loan. This may put your home at risk if you are late
or cannot make your monthly payments. Those loans with a large final
(balloon) payment may lead you to borrow more money to pay off this debt,
or they may put your home in jeopardy if you cannot qualify for
refinancing. And, if you sell your home, most plans require you to pay off
your credit line at that time. In addition, because home equity loans give
you relatively easy access to cash, you might find you borrow money more
freely.
Remember too, there are other ways to borrow money from a lending
institution. For example, you may want to explore second mortgage
installment loans. Although these plans also place an additional mortgage
on your home, second mortgage money usually is loaned in a lump sum,
rather than in a series of advances made available by writing checks on an
account. Also, second mortgages usually have fixed interest rates and
fixed payment amounts.
You also may want to explore borrowing from credit lines that do not use
your home as collateral. These are available with your credit cards or
with unsecured credit lines that let you write checks as you need the
money. In addition, you may want to ask about loans for specific items,
such as cars or tuition.
How much money can you borrow on a home equity credit line?
Depending on your creditworthiness (your income,
credit rating, etc.) and the amount of your outstanding debt, home equity
lenders may let you borrow up to 85% of the appraised value of your home
minus the amount you still owe on your first mortgage. Ask the lender
about the length of the home equity loan, whether there is a minimum
withdrawal requirement when you open your account, and whether there are
minimum or maximum withdrawal requirements after your account is opened.
Inquire how you gain access to your credit line -- with checks, credit
cards, or both.
Also, find out if your home equity plan sets a fixed time -- a draw period
-- when you can make withdrawals from your account. Once the draw period
expires, you may be able to renew your credit line. If you cannot, you
will not be permitted to borrow additional funds. Also, in some plans, you
may have to pay your full outstanding balance. In others, you may be able
to repay the balance over a fixed time.
What is the interest rate on the home equity loan?
Interest rates for loans differ, so it pays to check
with several lenders for the lowest rate. Compare the annual percentage
rate (APR), which indicates the cost of credit on a yearly basis. Be aware
that the advertised APR for home equity credit lines is based on interest
alone. For a true comparison of credit costs, compare other charges, such
as points and closing costs, which will add to the cost of your home
equity loan. This is especially important if you are comparing a home
equity credit line with a traditional installment (or second) mortgage,
where the APR includes the total credit costs for the loan.
In addition, ask about the type of interest rates available for the home
equity plan. Most home equity credit lines have variable interest rates.
These variable rates may offer lower monthly payments at first, but during
the rest of the repayment period the payments may change and may be
higher. Fixed interest rates, if available, may be slightly higher
initially than variable rates, but fixed rates offer stable monthly
payments over the life of the credit line.
If you are considering a variable rate, check and compare the terms. Check
the periodic cap, which is the limit on interest rate changes at one time.
Also, check the lifetime cap, which is the limit on interest rate changes
throughout the loan term. Ask the lender which index is used and how much
and how often it can change. An index (such as the prime rate) is used by
lenders to determine how much to raise or lower interest rates. Also,
check the margin, which is an amount added to the index that determines
the interest you are charged. In addition, inquire whether you can convert
your variable rate loan to a fixed rate at some future time.
Sometimes, lenders offer a temporarily discounted interest rate -- a rate
that is unusually low and lasts only for an introductory period, such as
six months. During this time, your monthly payments are lower too. After
the introductory period ends, however, your rate (and payments) increase
to the true market level (the index plus the margin). So, ask if the rate
you are offered is "discounted," and if so, find out how the
rate will be determined at the end of the discount period and how much
larger your payments could be at that time.
What are the upfront closing costs?
When you take out a home equity line of credit, you
pay for many of the same expenses as when you financed your original
mortgage. These include items such as an application fee, title search,
appraisal, attorneys' fees, and points (a percentage of the amount you
borrow). These expenses can add substantially to the cost of your loan,
especially if you ultimately borrow little from your credit line. You may
want to negotiate with lenders to see if they will pay for some of these
expenses.
What are the continuing costs?
In addition to upfront closing costs, some lenders
require you to pay continuing fees throughout the life of the loan. These
may include an annual membership or participation fee, which is due
whether or not you use the account, and/or a transaction fee, which is
charged each time you borrow money. These fees add to the overall cost of
the loan.
What are the repayment terms during the loan?
As you pay back the loan, your payments may change
if your credit line has a variable interest rate, even if you do not
borrow more money from your account. Find out how often and how much your
payments can change. You also will want to know whether you are paying
back both principal and interest, or interest only. Even if you are paying
back some principal, ask whether your monthly payments will cover the full
amount borrowed or whether you will owe an additional payment of principal
at the end of the loan. In addition, you may want to ask about penalties
for late payments and under what conditions the lender can consider you in
default and demand immediate full payment.
What are the repayment terms at the end of the loan?
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.
When you take out the loan, ask about the conditions for renewal of the
plan or for refinancing the unpaid balance. Consider asking the lender to
agree ahead of time and in writing to refinance any end-of-loan balance or
extend your repayment time, if necessary.
What safeguards are built into the loan?
One of the best protections you have is the Federal
Truth in Lending Act, which requires lenders to inform you about the terms
and costs of the plan at the time you are given an application. Lenders
must disclose the APR and payment terms and must inform you of charges to
open or use the account, such as an appraisal, a credit report, or
attorneys' fees. Lenders also must tell you about any variable-rate
feature and give you a brochure describing the general features of home
equity plans.
The Truth in Lending Act also protects you from changes in the terms of
the account (other than a variable-rate feature) before the plan is
opened. If you decide not to enter into the plan because of a change in
terms, all fees you paid earlier must be returned to you.
Because your home is at risk when you open a home equity credit account,
you have three days to cancel the transaction, for any reason. To cancel,
you must inform the lender in writing. Following that, your credit line
must be cancelled and all fees you have paid must be returned.
Once your home equity plan is opened, if you pay as agreed, the lender, in
most cases, may not terminate your plan, accelerate payment of your
outstanding balance, or change the terms of your account. The lender may
halt 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.
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