Bankers are competing hard for new home-equity debt, so there are plenty of excellent deals to be found. That's great news for the consumer, but it also means you need to shop around to find the best deal for you.
You should be able to find a bank that's offering zero closing costs. This means that the bank will pick up the cost of the appraisal and document handling, which includes a credit check, title search, and similar charges. (Low introductory fees and waivers of closing costs may not be offered if you opt for a 100% deal.)
Even though there may be no closing costs, look at the fine print to see if there are annual fees associated with the deal or if you're obligated to repay closing costs if you shut down the credit line within a year without selling your home.
You pay an extra half percentage point or so on your interest rate for the privilege of avoiding closing costs. If you plan to borrow a large amount, you may want to ask your lender to lower the interest rate if you pay the closing costs up front (usually $200 to $300).
For those not comfortable with variable rates, banks offer loans with convertible features. That means if the prime rate goes down, your rate does too. If the prime goes up, you have the option of converting the balance of the loan or line of credit to a fixed-rate loan at the going rate. There should be no additional charge for the conversion. If your home equity loan carries a fixed rate already, there are some banks that offer to reset the rate once during the life of the loan at no extra charge.
Most lines of credit offer you easy access to your credit by giving you a checkbook that you can use to tap whenever you need money. Some lenders also offer lines of credit linked to credit cards, debit cards, even ATM machines. You may even find a bank that's willing to hook your line of credit to your checking account so that you never again need to worry about bouncing a check.
Remember that whatever terms you choose, you're putting your home up as collateral; if you can't repay, you could lose your home. Compare each loan you consider, according to these points:
- Payment terms. These should be spelled out clearly. For example, you might be told that your line of credit is good for ten years, with a minimum monthly payment of $100 or 1/360 of the loan balance plus finance charges, whichever is greater. At the end of this ten-year draw period, you would have another five years to pay any remaining balance. Minimum terms during the repayment period would be 1/60 of the outstanding balance plus finance charges.Watch out for negative amortization, which means that interest payments are too low to let you pay back the loan during its term. The balloon payment at the end could catch you off guard. If you can't pay or refinance, you may have to sell or face foreclosure.
- Payment example. You must be given an example of what the minimum monthly payments would be if you borrowed a certain amount -- say, $10,000 -- and the interest rate reached its maximum level.
- Lenders' fees. These could include loan-application fees (typically around $150), one or more "points" (each at 1% of your credit limit) and a maintenance fee (often $75 or so).
- Third-party fees. Fees usually include amounts for home appraisals, credit reports and legal fees, and might total between $500 and $900.
- Rate features. Over 80% of home-equity loans are pegged to the prime rate. Lenders currently add one to three points to the prime to come up with their index rate. Should you encounter an equity line pegged to some other index -- the 90-day Treasury bill, for example -- ask the lender to provide you with an historical example showing how changes in the index rate in the past would have affected minimum payments due on the home-equity line compared with what you would have experienced with a loan tied to the prime. (An index that responds quickly to rising rates will also reflect a drop in rates much more quickly than a sluggish one such as the index of 52-week Treasury bills.)You must also be told about any annual or lifetime rate caps that apply. The index must be one that is out of the lender's control. Banks aren't allowed to use their own cost of funds as an index or change the index at their discretion.
After you commit yourself, you have three business days to back out of the loan if your principal residence serves as collateral.