For consumers who have built up equity in their homes, a home equity line of credit (HELOC) can provide immediate cash for expenditures on home improvements, medical bills or college tuition. You don't have to pay back the principal on the amounts you borrow immediately and the monthly interest payments are tax deductable. The actual cost of the money borrowed on a HELOC depends upon a myriad of factors, almost all of which can be determined by the choice of lender and HELOC product.
Sad to say, many people assume the best deals on HELOCs are automatically offered by their original banks or other lenders. Because your home secures the HELOC, it's critical to make an educated choice between competing lenders. Here are some cost-saving considerations when speaking with lenders or pouring over the fine print on a loan offer:
How Long Is the Draw Period?
During the draw period, the homeowner draws money out of the HELOC. During the draw, you may need to withdraw a minimum amount of funds each month to keep the account active. Some lenders expect the minimum taken out as a lump account on closing. Compare lenders on minimums; why pay interest on money you never needed to borrow? The lender sends a monthly statement: you may pay principal on it as well as interest. How long is the draw period and how long do you have to repay the balance once it closes? The length of the draw period is critical in amortizing the repayment on a schedule favorable to the borrower. Is the draw renewable?
What's the Rate?
If a consumer accepts a teaser rate, how much will it leap after the introductory period? All HELOCs come with variable interest rates. Ask the lender about their margin – the prime rate plus points. Some lenders operate under a maximum interest rate lifecap, and comparing offers this way can reign in total costs. Remember, interest rate mark-ups from lenders cannot be locked out of the agreement. A start rate of an enticing 3.75% can skyrocket to 6% at the close of the introduction period.
Are There Prepayment Penalties?
Avoid a HELOC lender that wants you to agree to prepayment penalties. These are charged to homeowners who cancel the HELOC early. A prepayment penalty is an especially poor idea if the borrower intends on selling the home and moving within five years. If the other aspects of the HELOC offer look favorable, tell the lender you want to negotiate the penalty and see what happens.
What Are the Other Associated Charges?
A dedicated loan shopper can find differences as well between lenders when it comes to customary charges associated with the equity loan. These include application fees, appraisal fees, closing costs (lender fees), annual fees, cancellation fees, and account inactivity charges. Consumers should be able to negotiate some or all of the elimination of annual fees, lender fees, required balances, and minimum draw requirements. Cancellation fees can often be removed after the account is open for three years.
Using these considerations, you should be able to distinguish between HELOCs that address your financial concerns. And there are always things to be aware once you have a HELOC.