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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.
Home Equity Credit Lines
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.)
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.
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
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.
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.
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.
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,
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.