|
More and more
Americans are interested in using a credit line to borrow against
the equity in their home, according to the Federal Trade Commission
(FTC). Homeowners are using the infusion of cash to fund remodeling
projects or pay college tuition. Lenders are responding to the
demand by offering a variety of home equity credit lines.
They also offer second mortgage installment loans. These loans provide a lump
sum of money, rather than a series of advances made by writing checks on the
credit line account, and are usually available with fixed rates and fixed payments.
Most credit lines come with variable interest rates, some offer attractive low
introductory rates, and others have fixed rates. Some will have large one-time,
up-front fees, others charge closing costs, while others will have continuing
costs, such as annual fees. Some have balloon payments at the end of the loan,
or no balloons but higher monthly payments instead.
The FTC urges homeowners to contact different lenders, compare the options and
then select the equity credit line that best meets their individual needs. Also,
be sure to understand the loan’s language before you sign any paperwork.
How will you know which home equity credit line is right for you? If you need
a large amount of cash, these credit lines may be useful in that respect, and
they may also provide a tax advantage not available with other types of loans.
Check with your tax advisor for details, if you are uncertain. When you take
out one of these lines, you will be using your home for collateral. This may
put your home at risk if you are late with a payment. If you sell your home,
most plans require you to pay off the loan at that time.
Depending on your credit-worthiness, which is a combination of such things as
your income and your credit rating, as well as your outstanding debt, some home
equity lenders may allow you to borrow a much as 85 percent of the appraised
value of your home, minus the amount you owe on your first mortgage, according
to the FTC.
As you begin research into the various kinds of home equity credit lines, you
should ask about the length of the loan, whether there is a minimum withdrawal
limit when you open the account, and what the withdrawal limits are after the
account has been opened. Will you gain access to the account via checks, credit
card or both? Is there a fixed time when you can make withdrawals, and how will
repayment be made, either paid in full, or with installments over a fixed period
of time?
Interest rates will vary from lender to lender, so it is important to compare
the annual percentage rate (APR), which indicates the cost of the credit on a
yearly basis. It is important to understand that the advertised APR for home
equity credit lines is based on interest alone.
If you want a true comparison
of costs, consider other charges, such as points and closing costs.
If you are considering a variable interest rate with this type of loan, compare
terms. Will it have a periodic cap, which is the limit on interest rate changes
over time, or will it have a lifetime cap, which is the limit on interest rate
changes throughout the term of the loan?
Some lenders will also offer an introductory rate, or temporarily discounted
interest rate. You’ll have lower payments at first, but the rates will
increase to match true market level after a period of perhaps six months. If
the rate you are considering is “discounted,” find out what the rate
will be at the end of the introductory period, and what your payments will be
at that time.
When you take on one of these lines of credit, you will pay for many of the same
expenses as you did when you took out an original mortgage, including application
fee, title search, appraisal, attorney’s fees, and points.
Finally, it will be important to find out what the repayment terms are during
the life of the loan. Ask the potential lender if you are paying back both principal
and interest, or only interest.
- For more information about home equity credit lines, contact First Bank,
116 Springstowne Center in Vallejo. Call (707) 554-0390.
|
|
First
Bank
|
