List: Regulations on Home Equity Lines of Credit

A home equity line of credit is a revolving line of credit that is taken against the equity on your house. Failure to repay the loans can end in foreclosure of your house. A HELOC works like a credit card where you can draw money at any time, up to maximum amount of the loan. The lender will allow a 5 to 10 year “draw” period. HELOCs are attractive because they offer flexibility in repayment. A Home Equity Line of Credit (HELOC) has many important regulations that you should know:

Interest Rates

HELOCs usually have variable interest rates. The interest is tied a publicly available index, such as the U.S. Treasury Bill rate. Interest rates are calculated on a daily basis. Make sure you know which index your lender uses because the volatility of the index can affect your payment. Research the index fluctuations before you agree to any loan terms. You should be aware of how high the interest rate has risen in the past, and whether it had been subject to many fluctuations. Usually, the interest rate on an HELOC will include about a 2% margin above the index rate.

By law, there must also be a maximum interest rate, or cap. A cap is the highest rate the borrower will be charged. While HELOCs usually have variable interest rates, some lenders will allow you to switch to a fixed rate or allow you to convert all or parts of what you owe into a fixed term installment loan. Additionally, many lenders will offer low introductory rates or a short period of time, like 6 months or a year.  It is very important to note that lenders can afford to give you good interest rates because their risk is low since they have your home as collateral.

Credit Limit

You should also be aware of how your credit limit is calculated. Lenders take a percentage of the home’s appraised value, and then subtract the balance of the existing mortgage. The lending party will also look at your income, debts, credit history and financial obligations.

Minimums

Some loans require that you draw a minimum initial amount. For example, a lender may require that you take out at least $2000, and keep the money out for at least six months. Also, lenders may require a minimum withdrawal amount each time you withdraw funds. Many loans have clauses that require you to keep a minimum amount of credit outstanding at all times in order for the line to remain open.

Fees

HELOCs have many fees. Some of these fees are charged when you purchase your home. The most common fees are appraisal fee, application fee, attorney costs, title search, mortgage preparation and filing, property and title insurance, taxes, membership or maintenance fees, and transaction fees. The fees can add up and you should really consider what you need the money for before you borrow. You might find that you have spend hundreds of dollars to open your line of credit, which will not be worth it if you do not intend to draw a lot of money from it.  

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