Four Things To Watch For When You Get A Home Equity Line Of Credit

Home equity loans are a great way to get the cash you may need - for just about any reason. It could also be enough money to fulfill some of your dreams, too, if you have lived there for some time. Many people are tapping into their home equity in order to do some things they have always wanted to do. Still, though, there are some traps along the way that can be costly to those who are not watching. Here are four things to watch for when you get your home equity line of credit.

What Is The Interest Rate?

Probably one of the most important things that you need to watch for is the interest rate on the home equity line of credit (HELOC). This will mean that you need to watch the market some and be a little patient. Wait until you see that the interest rate is good. The interest rate may be near that of a first mortgage, but will often be a little higher.

Besides the interest rate, though, there will also be what is called a margin. This is an interest rate that is added to the prime rate, and it remains on it for the life of the loan. This figure is variable with each lender, and they often will not reveal it unless they are asked. You need to ask, because this could, in some cases literally double the interest you will be required to pay.

Is There A Guaranteed Conversion - If Necessary?

Because a home equity line of credit is an adjustable rate loan, you will want to have the protection of being able to convert - if necessary. This means that if the prime rate becomes high, that you will be able to convert your now high interest loan to a fixed rate loan. Oftentimes, adjustable rate loans have no caps on the interest rates, or very limited control over the caps. Currently, there are only about two states that put a cap on it - of about 16 to 18%!

What Charges Apply?

A home equity loan can come with quite a few charges - or just a couple of them. It really is up to the lender and what they think they might be able to get away with. Many home equity lines of credit do not have any closing costs now, so look around to find one that does not.

Other charges may include a charge per check that you write. Another is a charge that will be given you if after a certain period of time you have not withdrawn any more money - often referred to as an inactivity fee. Then there may be an annual fee, or a monthly fee for participation in the program.

How Is It To Be Paid For - Amortized?

Another thing that you must look into is to find out how the home equity line of credit
loan is to become amortized. You need to know how long is the draw period - the time that you have to withdraw the funds as you need them, and when you start paying on the principal of the loan. Some HELOC's require a balloon payment for the full amount at the end of the draw period. This would require that you refinance the loan. Other plans require that you start making payments that will fully amortize the amount you borrowed, but the time period to do so may vary.

As you can see, there are many different features given by different lenders. You want to make sure that you get several quotes when you go to apply for your home equity line of credit. Then carefully evaluate and compare them in order to find the features you like and that will fit your particular need for your equity.