Shopping for a Home Equity Line of Credit
Written by Daphne Tai, Kristina Lee   

Not all HELOCs are created equal. If you don’t spend enough time shopping, you could end up paying unnecessary fees or being charged a huge extra fee. There are several things to pay attention to while shopping for a home equity line of credit:
  • A plan which fits your needs
  • Variable interest rates
  • The HELOC margin
  • Hidden HELOC fees
  • Additional HELOC features

Trying it On, And Making Sure It Fits

First of all, you should look for the plan that best meets your particular needs. Read the credit agreement carefully and examine the terms and conditions of various plans, including the APR and the costs of establishing the plan.


Be Wary of Varying Interest Rates

Home equity lines of credit involve variable interest rates instead of fixed interest rates. The variable rate must be based on a publicly available index, such as a U.S. Treasury bill rate. In other words, the interest rate you pay for the line of credit will fluctuate according to this particular index. Because the cost of borrowing is tied directly to the value of this index, it is crucial to find out which index is used, how often the index changes, and how high it has risen in the past.


Margin, Margin, Margin

The margin should be your primary concern when shopping for a HELOC loan. The margin is the difference between the index rate and the interest rate the borrower will be charged. A large number of HELOC lenders use the prime rate as an index. So if a borrower is given 2% margin, he will always be charged 2 % above the prime rate. If the prime rate is at 4%, his interest rate will be 6%. If the prime rate is at 8%, his interest rate will be 10%. Therefore, you would want the margin to be as minimal as possible.


Playing Hide and Seek with Hidden Fees

Since we have a variety of lenders to choose from, it is possible to take out a HELOC without paying any fees at all. When you choose a HELOC plan, make sure that you won’t be responsible for some unnecessary fees:
  • Application Fee: Some lenders do not charge a fee for applying.
     
  • Appraisal Charge: Someone has to pay for an appraisal to be done, but many lenders will absorb this cost themselves.
     
  • Closing Costs: Closing costs are almost necessary for many home loans except home equity line of credit.
     
  • Check Fees: You should not be charged extra every time you withdraw from your credit line.
     
  • Repayment Penalty: Usually borrowers should not be penalized for paying off a line of credit before the end of the term; this is quite different than a traditional loan.

Bonuses to Ask For

Not only we need to be aware of the hidden fees, we should also maximize our benefits by requesting additional HELOC features.
  • Lifetime Interest Rate Cap: This is the maximum amount that your interest rate can adjust to during the life of the loan. Because we have variable interest rates rather than fixed interest rates, it is possible that interest rate rise dramatically. Do not accept a cap that is so high and makes you not able to afford the monthly payments in the future.
     
  • Fixed-Rate Conversion: A few lenders allow borrowers to convert withdrawals to a fixed interest rate. This is an attractive feature for borrowers concerned about rising interest rates.
     
  • Low Introductory Rate: Most HELOCs start with an introductory rate – the lower, the better.
     
  • Unrestricted Ability to Repay Principal Without Penalty: If you want the flexibility to pay down principal on the loan when you choose to, then you should look for this feature.
All the borrowers should shop around and find a HELOC loan with many of these features. There are a lot of lenders out there trying to survive in this competitive market. Not only your local banks are available, credit card companies, mortgage bankers, brokerage firms have all entered the market and offer competing products. Credit unions should not be overlooked because they usually offer excellent terms. In additional, there are many reputable online sources that have lower costs and may offer better terms than the local banks.


Last Updated on Wednesday, 22 December 2010 05:54