If you are a homeowner, you've probably received offers to apply for a home equity line of credit (HELOC). Handled with care, home equity credit lines can be an excellent way to improve financial flexibility, provide readily available cash reserves for emergencies, or pay for large expenses (like college tuition or home improvements) that have irregular payment schedules. But be aware that not all home equity credit lines are created equal. If you decide that a HELOC is right for you, what features should you look for? Here are ten things that should be at
top of your list:1. No application fee (or fee should be refunded at closing) - The HELOC market is very competitive. Some lenders may charge a fee to help cover their costs of processing your HELOC application and to ensure applications are received only from seriously interested homeowners. If your lender assesses an application fee, be certain that it is refundable at closing. Otherwise, look elsewhere for your HELOC.
2. No appraisal or closing costs - The market value of your property is key to determining amount of your credit line. Some lenders are willing to use publicly available tax assessment data in lieu of formal appraisals. Others may absorb appraisal costs to attract customers. Either way, there are enough no-cost options available that you should not have to settle for HELOC lender that charges appraisal costs or any other closing costs.
3. No account maintenance or check-writing fees - Lenders obviously make their money when you write checks (borrow) on home equity credit line. Most lenders make it as hassle-free as possible with free checks and, sometimes, even debit cards. If your lender charges fees for privilege of having a HELOC checking account, look elsewhere
4. No "non-usage" fees - The market value of your property is key to determining amount of your credit line. Some lenders are willing to use publicly available tax assessment data in lieu of formal appraisals. Others may absorb appraisal costs to attract customers. Either way, there are enough no-cost options available that you should not have to settle for HELOC lender that charges appraisal costs or any other closing costs.
5. Variable APR equal to or near prime rate (adjusted quarterly) - The only cost involved with a good home equity credit line should be interest charged (APR) on balance borrowed. As with any loan, borrower's goal is to get lowest possible APR. Most lenders use "prime rate" as published in Wall Street Journal (or other publication) as a base index and charge you an APR equal to prime plus or minus a marginal percentage (e.g. 0.25%). Search for best rate available, but be aware of low "teaser" rates that may suddenly change after a brief introductory period or be accompanied by special fees. Also, keep in mind that periodic and lifetime caps on rate changes are as important as initial rate (see below).
6. Periodic cap on interest rate changes (the amount that rate can be changed at one time) - Virtually all HELOC's are variable rate loans meaning that initial interest rate (APR) will change at some point as surely as weather. A key is to understand how often rate can adjust and how much rate can be adjusted at one time. Of course, when rates are falling larger and faster change, better for you. But more important is upside risk you face when rates are rising. Look for a HELOC that adjusts quarterly (rather than monthly) in increments of 0.5% or less. Note: with expectations of rising interest rates, many lenders appear to be eliminating periodic rate cap feature and raising lifetime caps to legal limits. If you have an older HELOC that incorporates relatively low rate ceilings (or if you find one), consider yourself fortunate!
