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South
Florida Mortgages and South Florida Home Loans
Home
Equity Line of Credit - HELOC
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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