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f a s t f a c t s
U
sing a credit line to borrow against the equity
in your home has become a popular source of
consumer credit. And lenders are offering these
home equity credit lines in a variety of ways.
You will find most loans come with variable
interest rates, some come with attractive low
introductory rates, and a few come with fixed
rates. You also may find most loans have large
one-time upfront fees, others have closing costs,
and some have continuing costs, such as annual
fees. You can find loans with large balloon
payments at the end of the loan, and others with
no balloons but with higher monthly payments.
No one loan is right for every homeowner.
The challenge, then, is to contact different
lenders, compare options, and select the home
equity credit line best tailored to your needs.
Be sure to review the home equity contract
carefully before you sign it. Do not hesitate to
ask questions about the terms and conditions of
your financing. To help you do this, you may
want to consider the following questions and to
use the checklist at the end of this brochure.
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 at
least, 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. (Check
with your tax adviser for details.)
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 are
late or cannot make your monthly payments.
Those loans with a large final (balloon) payment
may lead you to borrow more money to pay off
this debt, or they may put your home in jeopardy
if you cannot 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 more
freely.
Remember too, there are other ways to
borrow money from a lending institution. For
example, you may want to explore second
mortgage installment loans. Although these plans
also place an additional mortgage on your home,
second mortgage money usually is loaned in a
lump sum, rather than in a series of advances
made available by writing checks on an account.
Also, second mortgages usually have fixed
interest rates and fixed payment amounts.
You also may want to explore borrowing
from credit lines that do not use your home as
collateral. These are available with your credit
cards or with unsecured credit lines that let you
write checks as you need the money. In addition,
you may want to ask about loans for specific
items, such as cars or tuition.
How Much Money Can You Borrow
on a Home Equity Credit Line?
Depending on your creditworthiness (your
income, credit rating, etc.) 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 gain access
to your credit line 00with checks, credit cards,
or both.
Also, find out if your home equity plan sets a
fixed time 00a draw period 00when you can
make withdrawals from your account. Once the
draw period expires, you may be able to renew
your credit line. If you cannot, you will not be
Home Equity
Credit Lines
00/span>
When opening a home equity credit
line, expect these expenses: an
application fee, title search, appraisal,
attorneys' fees, and points.
00/span>
A "discount" rate is a low, introductory
interest rate that usually lasts
only six months. Find out what the
rate will be at the end of that period.
00/span>
Most credit lines have variable
interest rates. If the interest rate goes
up, so does your monthly payment.
00/span>
Some lenders charge continuing fees,
such as transaction fees each time
you borrow money.
00/span>
When you open a home equity
account, you have three days to
cancel the transaction, for any
reason. You must cancel in writing.
Homes/Real Estate
Facts
for Consumers
Federal Trade Commission Toll-free 1-877-FTC-HELP
www.ftc.gov
For the Consumer
5
34
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 is the Interest Rate on the
Home Equity Loan?
Interest rates for loans differ, so it pays to check
with several lenders for the lowest rate. Compare
the annual percentage rate (APR), which
indicates the cost of credit on a yearly basis. Be
aware that the advertised APR for home equity
credit lines is based on interest alone. For a true
comparison of credit costs, compare other
charges, such as points and closing costs, which
will add to the cost of your home equity loan.
This is especially important if you are comparing
a home equity credit line with a traditional
installment (or second) mortgage, where the APR
includes the total credit costs for the loan.
In addition, ask about the type of interest
rates available for the home equity plan. Most
home equity credit lines have variable interest
rates. These variable rates may offer lower
monthly payments at first, but during the rest of
the repayment period the payments may change
and may be higher. Fixed interest rates, if
available, may be slightly higher initially than
variable rates, but fixed rates offer stable monthly
payments over the life of the credit line.
If you are considering a variable rate, check
and compare the terms. Check the periodic cap ,
which is the limit on interest rate changes at one
time. Also, check the lifetime cap , which is the
limit on interest rate changes throughout the loan
term. Ask the lender which index is used and
how much and how often it can change. An
index (such as the prime rate) is used by lenders
to determine how much to raise or lower interest
rates. Also, check the margin, which is an
amount added to the index that determines the
interest you are charged. In addition, inquire
whether you can convert your variable rate loan
to a fixed rate at some future time.
Sometimes, lenders offer a temporarily
discounted interest rate 00a rate that is unusually
low and lasts only for an introductory
period, such as six months. During this time,
your monthly payments are lower too. After the
introductory period ends, however, your rate (and
payments) increase to the true market level (the
index plus the margin). So, ask if the rate you
are offered is "discounted," and if so, find out
how the rate will be determined at the end of the
discount period and how much larger your
payments could be at that time.
What Are the Upfront Closing Costs?
When you take out a home equity line of credit,
you pay for many of the same expenses as when
you financed your original mortgage. These
include items such as an application fee, title
search, appraisal, attorneys' fees, and points (a
percentage of the amount you borrow). These
expenses can add substantially to the cost of your
loan, especially if you ultimately borrow little
from your credit line. You may want to negotiate
with lenders to see if they will pay for some of
these expenses.
What Are the Continuing Costs?
In addition to upfront closing costs, some lenders
require you to pay continuing fees throughout the
life of the loan. These may include an annual
membership or participation fee, which is due
whether or not you use the account, and/or a
transaction fee, which is charged each time you
borrow money. These fees add to the overall
cost of the loan.
What Are the Repayment Terms
During the Loan?
As you pay back the loan, your payments may
change if your credit line has a variable interest
rate, even if you do not borrow more money
from your account. Find out how often and how
much your payments can change. You also will
want to know whether you are paying back both
principal and interest, or interest only. Even if
you are paying back some principal, ask
whether your monthly payments will cover the
full amount borrowed or whether you will owe
an additional payment of principal at the end of
the loan. In addition, you may want to ask
about penalties for late payments and under
what conditions the lender can consider you in
default and demand immediate full payment.
What Are the Repayment Terms at
the End of the Loan?
Ask whether you might owe a large payment at
the end of your loan term. If so, and you are not
sure you will be able to afford the balloon
payment, you may want to renegotiate your
repayment terms. When you take out the loan,
ask about the conditions for renewal of the plan
or for refinancing the unpaid balance. Consider
asking the lender to agree ahead of time and in
writing to refinance any end-of-loan balance or
extend your repayment time, if necessary.
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 are 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 (other
than a variable-rate feature) 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 to cancel the transaction, for any
reason. To cancel, you must inform the lender
in writing. Following that, your credit line
must be cancelled and all fees you have paid
must be returned.
Once your home equity plan is opened, if
you pay as agreed, the lender, in most cases,
may not terminate your plan, accelerate payment
of your outstanding balance, or change
the terms of your account. The lender may halt
credit advances on your account during any
period in which interest rates exceed the
maximum rate cap in your agreement, if your
contract permits this practice.
If you have questions about home equity
credit lines, write to: Consumer Response
Center, Federal Trade Commission,
Washington, D.C. 20580. Although the
FTC generally does not intervene in
individual disputes, the information you
provide may indicate a pattern or practice
that requires action by the Commission.
To obtain a free copy of our Best
Sellers 00hich lists all the FTC's consumer
and business publications00rite
to: Consumer Response Center, Federal
Trade Commission, Washington, D.C.
20580.
for more information
6
June 1992
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