How to Shop for a Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is extended to qualified consumers who can borrow using their homes as collateral. Once the account is established, homeowners can draw on the line to pay for home improvements, medical bills, a vacation, or for unplanned emergency expenditures. There is no minimum amount to borrow. The HELOC includes a draw term, typically up to 20 years, after which time the balances and interest are to be paid in full. Interest rates pegged to the national rate are variable. Fixed-rate hybrids are available from some lenders that lock consumers into the rate when they open the HELOC. Because of the range of HELOC loans and terms by lenders, homeowners can find the best deals by comparing offers at LendingTree. Here are some things to explore:

How are interest rates determined on HELOCS?

Interest rates are calculated based on a published major national interest rate, typically on an index with a small increase (around 2 points) for the lender's margin. The HELOC rate rises and falls in direct proportion to the index. Some lenders will agree to a temporary low introductory or initial rate for up to six months and then adjust it upwards. Lenders create ceilings on the rates to product consumers from dramatic spikes in the index. While comparing plans, customers need to know exactly how their interest will be calibrated and maintained. Because the loan is backed by personal collateral, HELOC interest rates are typically lower than those applied to other credit options.

Are there fixed-rate HELOCs?

According to the Federal Reserve Board, variable rate plans must conform to federal laws requiring a cap on the total amount of the credit line and limits on the amount the interest rates may increase over the life of the HELOC. Lenders offering fixed-rate HELOCS may allow consumers to convert their variable rate products during the term, creating a fixed-rate installment schedule for repayment. A fixed rate can be a good option in times of escalating interest rates.

What are the consumer costs of setting up a HELOC?

Set-up costs are similar to those involved when consumers seek a mortgage. There can be charges for a property appraisal, application fee, up-front lender charges (typically one or two points), attorney fees, and insurance.

What will monthly payments look like?

Compare plans. Some lenders establish a monthly minimum payment combining a portion of the principal and interest. If the monthly payments on the principal are too low, consumers may not have paid it off by the end of the term when the bill comes due. Other lenders may offer an interest-only monthly payment plan, requiring full and immediate repayment at the end of the draw term. If consumers decide to sell the house, the entire HELOC balance must be paid off. Conventional wisdom suggests consumers pay at least a portion of the principal with their regular monthly interest payments to avoid a whopping balloon payment at the end. If they plan to sell their home in the near future, owners should decide if the up-front costs of establishing a HELOC are worth it.

Does the home equity line of credit expire after a specified term, after which time full payment is required?

It depends on the plan. After the conclusion of the draw period (typically 10-15 years), the lender may allow the consumer to renew the credit line. If not, the plan may call for an immediate repayment on the balance or the lender can establish a monthly repayment plan for up to 10 years. Choosing the right HELOC can make the difference between making a prudent credit decision and plotting a course toward unmanageable debt.

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