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HELOC: home equity line of credit. This type of loan,
which became popular in the mid-1980s, is a revolving
credit in which your home serves as collateral.
By using the equity you have
accumulated in your home, you may qualify for a sizeable
amount of credit which you might in turn use for
education, medical bills, home improvement or other
high-dollar expense. Before taking a home equity loan,
be sure you carefully weigh the pros and cons, the costs
and the benefits.
With a home equity line of credit, you
can use the credit wherever and whenever you choose.
While the interest rate is relatively low, be sure you
understand the credit terms and that should you fail to
repay the amounts you borrowed, you could lose your
house.
To determine your credit limit, your
lender will determine the appraised value of your house
and then subtract from that value the amount you still
owe on your existing mortgage. The lender will also
consider your credit worthiness by examining your
income, credit history and other financial obligations.
Once you’ve been approved for a home
equity line of credit, you will be allowed to borrow up
to your credit limit whenever you want. The lender will
probably provide you with special checks or a credit
card to use when drawing on your line of credit.
Many home equity loan plans set a
fixed period, called the “draw period”, during which you
may borrow money. At the end of this period, for example
10 years, the lender may call for payment in full of any
outstanding balance. You may also ask your lender for a
repayment plan over a fixed period, so that you do not
have to pay the loan in full at one time.
Generally, with a home equity line of
credit, the interest rate is variable, rather than
fixed. Federal law requires a ceiling on how high your
payment can go, and customary usage provides a cap on
how low your interest rate may fall if interest rates
drop. At some point during the life of the loan, many
lenders will allow you to convert from a variable
interest to a fixed interest rate for the life of the
loan.
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Keep in mind that there are upfront
expenses in establishing a home equity line of credit.
However, because your home serves as collateral, the
lender’s risk is lower than most other forms of credit,
so the annual percentage rates are lower. When repaying
your home equity loan, you may choose to pay down the
principal regularly as you do with other types of loans.
Establishing a HELOC
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Fee for property appraisal to
determine the value of your home
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Application fee (may or may not
be refunded if your loan is denied)
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Closing costs including attorney
fees, title search or title insurance and taxes
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You may also be responsible for
other fees such as an annual maintenance fee and a
transaction fee for each time you draw on your line
of credit
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Other upfront charges (discuss
with your lender)
If a home
equity line of credit is not for you, you might also
consider the traditional home equity loan. This type of
loan provides you with a fixed amount of money up front
with an equal payment schedule.
Before making any decisions, be sure
to discuss your options with your local community
banker. Your home is one of your most important
possessions and you don’t want to risk losing it. Ask
your community banker to compare your options and help
you determine the loan best suited for your needs and
ability to repay.
CONSUMER TIPS is provided as a public
service by the Missouri Independent Bankers Association
AND
Community Bank of the Ozarks
P.O. Box 43
Sunrise Beach, MO 65079
(573) 374-5245
1-800-927-4314
www.cbobanker.com
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