Home Equity Line of Credit Fees and Fun
Written by Daphne Tai, Fiona Gu   


Cost of Borrowing Money

It is extremely important to you to acknowledge your ability (or inability) to pay back your loans before you take them out. One thing that deeply affects this ability is the HELOC Annual Percentage Rate (APR). This APR is determined by a combination of the
  • Average daily balance (The average daily balance is the balance total at the end of every day divided by the total number of days in a period).
     
  • Prime rate (the short-term interest rate that commercial banks charge to their most credit-worthy customers).
     
  • Margin (the difference between the prime rate and the interest rate that the borrower must pay) designated by the bank or lender.

Many lenders give borrowers the prime rate with zero margins as an introductory rate, which will often go up after the first few months. But if your loan scenario is a bit more risky, the lender may charge you a higher interest rate, which is the prime rate plus a higher margin.

Remember to look at both the APR and other charges. APRs are the rates quoted to borrowers. The determinants of the rate are usually borrowers’ credit reports and the level of default risk. APR is equal to the interest rate per period multiplied by the number of periods in a year.

Notes: Do not simply compare the APRs for a Home Equity Loan and a HELOC because the APRs on HELOC are figured differently. The APR for a traditional second mortgage loan takes into account of the interest rate plus points and other finance costs. However, the APR for a HELOC is based on the periodic interest rate alone, plus some margin. It does not include points or other fees.


Additional Fees

Aside from the distinct HELOC APR, many of the costs for setting up a HELOC are similar to those you pay when you buy a home. These fees include but are not limited to:
  • Appraisal – to estimate the value of your property / home
     
  • Application fee
     
  • Up-front charges - such as one or more points
     
  • Early Closure Fee - This is approximately $300
     
  • Closing costs (Note: Lenders may waive some or all of these closing costs)

    • Fees for attorneys
    • Title search
    • Mortgage preparation and filing
    • Property and title insurance

Some Hidden Drawbacks of a HELOC:
  • Adjustable-rate Mortgage (a loan program with variable interest rate that can change throughout the period): This adjustable rate is closely related to the prime rate. Whenever the fed changes the prime rate, your HELOC rate would change as well. Normally, the fed would change the prime rate at 0.25% each time. However, the high frequency of the changes by the fed can increase the prime rate by a large amount. For example, in 2004, the fed raised the prime rate 20 times which caused the rate to increase from 4% to 8.25%. Therefore, if your HELOC interest rate is structures like an ARM loan, the interest you pay can be extremely volatile.
     
  • No Periodic Interest Rate Caps: HELOC has lifetime caps only. This means that the interest rate can fluctuate by any amount that the fed allows it to. In California, the fluctuation is usually 18%.
     
  • Minimum Draw Amount: Some Home Equity Lines of Credit require you to draw a minimum amount each time you draw on the line, or that you always have some set balance outstanding. This can add up to large additional interest fees.


 
Last Updated on Wednesday, 22 December 2010 05:56