Is a Home Equity Credit Line for You?

If you need to borrow money, home equity lines may be one useful source of credit. Initially, they may provide you with large amounts of cash at relatively low interest rates. And they may provide you with certain tax advantages unavailable with other kinds of loans.

At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you're late or cannot make your monthly payments. Those loans with a large final payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you can’t qualify for refinancing. And, if you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money too freely.

How much money can you borrow on a home equity credit line?

Depending on your creditworthiness and the amount of your outstanding debt, home equity lenders may let you borrow up to 85% of the appraised value of your home minus the amount you still owe on your first mortgage. Ask the lender about the length of the home equity loan, whether there is a minimum withdrawal requirement when you open your account, and whether there are minimum or maximum withdrawal requirements after your account is opened. Inquire how you can gain access to your credit line -- with checks, credit cards, or both.

Also, find out if your home equity plan sets a fixed time -- a draw period -- when you can make withdrawals from your account. Once the draw period expires, you may be able to renew your credit line. If you can't, you won't be permitted to borrow additional funds. Also, in some plans, you may have to pay your full outstanding balance. In others, you may be able to repay the balance over a fixed time.

What safeguards are built into the loan?

One of the best protections you have is the Federal Truth in Lending Act, which requires lenders to inform you about the terms and costs of the plan at the time you’re given an application. Lenders must disclose the APR and payment terms and must inform you of charges to open or use the account, such as an appraisal, a credit report, or attorneys fees. Lenders also must tell you about any variable rate feature and give you a brochure describing the general features of home equity plans.

The Truth in Lending Act also protects you from changes in the terms of the account before the plan is opened. If you decide not to enter into the plan because of a change in terms, all fees you paid earlier must be returned to you.

Because your home is at risk when you open a home equity credit account, you have three days after you receive the closing papers to cancel the transaction, for any reason. To cancel, you must inform the lender in writing. Upon timely cancellation, your credit line must be cancelled and all fees you've paid must be returned.

Questions to ask before you sign the dotted line:

• What is the interest rate on the home equity loan?
• What are the upfront closing costs?
• What are the continuing costs?
• What are the repayment terms during the loan?
• What are the repayment terms at the end of the loan?

Top