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What should I look for in a home equity line of credit?

When looking for a Home Equity Line of Credit, there are several factors that you need to consider. These include the terms of repayment, interest rate and other fee etc..

Let us take a look at the major factors that you should consider when thinking about taking out a home equity line of credit:

Application Fee: Ideally there should be zero application fee while taking out a home equity line of credit. However, if you are not able to get a deal with a zero application fee, make sure that the fee you are paying is refundable when the line of credit closes.
Interest rate: If you are being charged a variable APR, then that APR will be expressed as prime plus 2% or prime plus 3% etc. This means that the lender will charge you two or three percent over the prime rate. Look for the lowest interest rate possible.
Appraisal fee: In order to determine what is the right price for your house, the lender will need to appraise your property. Lenders should absorb this cost and you should not be required to pay any fee for this.
No usage fee: No usage fee means that if you are not using your home equity line of credit, you end up paying a fee to the lender. This is not a good thing at all andÂ you should avoid this completely
Maximum APR: If you are availing a variable APR, then your bank will have the option to increase the APR as the prime rate increases. You should check whether there is a cap on this at all. Ideally there should be a cap on the maximum APR that you can be charged.
Repayment Terms: Examine the terms of repayment carefully, some lenders allow you to make payments only towards the interest while the home equity line of credit is active. This is not a good thing and you should be able to repay principal also. Additionally some lenders put a penalty on borrowers who pay extra principal. You should bargain to get this penalty waived. If it is not waived, then you should at least be aware of it and try to reduce it as much as possible.
Introductory Rate: Like credit cards, home equity line of credits also come with an introductory rate. Be sure to ask for an introductory rate on your loan.
Closing costs: There are several costs that are associated with closing a line of credit. You need to be aware of the various options available to you. You can also go in for a plan which has no closing costs, but that has other riders attached. There are also plans that deduct the closing costs from your line of credit. Explore your options and choose one that suits you the most.

Since your house is one of your biggest assets, any decision that puts your house on the line needs to be taken carefully. Use these parameters to select the best home equity line of credit option for you.

Should I take a home equity loan?

Home Equity Loan is a lump sum loan taken out on your home equity. Home Equity Loan is a second mortgage that has become quite popular with home-owners, as they saw the value of their homes appreciate steadily during the housing boom.

The lesson from the housing crisis is that you should not take a home equity loan for any expense that will not generate returns. For example, a kitchen renovation or a long due holiday are not good enough reasons to take out a home equity loan.

On the other hand, college education for your children is a good enough reason to take out a home equity loan.

Here are some factors that you should consider when thinking about a home equity loan:

Has the value of your house risen substantially? Like any other assets, housing prices are also cyclical in nature. If the value of your house has risen substantially in the past few years, then there are good chances that they will come down in the future. Consider this and take out a loan that is substantially lower than your maximum limit.
How will you repay for your home equity loan? A lot of home equity loans have options to pay very little during the duration of the loan. At the end of the term, you will either need to make a balloon payment or refinance the loan. Such terms and conditions are fertile grounds for getting into perpetual debt. If you don’t have a good plan of getting out of this debt, then it is wise to stay away from it.
Do you plan to rent out your home? Some home equity plans prevent you from renting out your home. So if you were considering renting out, then make sure you check whether the bank will allow you to rent out, once you take the home equity loan.
Purpose of the home equity loan? If you are planning to take the home equity loan for an expense like a vacation or a renovation, then it is better to avoid it. The house is the most valuable asset for most families, therefore tapping into it for expenses that can be avoided, eats into what could be your “rainy-day” money.
Are you willing to put your house on the line? The current spate of foreclosures should make this point really obvious to all. Since, your house acts as a collateral in a home equity loan, the bank can seize your house and sell it, in case of default. So be sure that your ability to repay the loan, amount of the loan and the current market prices are balanced and one of these factors do not create a condition where you may face foreclosure.

These are just some questions that you need to ask yourself, when going in for a home equity loan. Home equity loans are a great souce of money when you really need it. Since, the collateral is your house itself, be sure that you really do need the money.

What is Home Equity Line of Credit?

Home Equity Line of Credit is like a credit card loan. That means that you can borrow money up to a certain level, based on your home equity.

How is Home Equity Line of Credit calculated?

In theory, Home equity limit is determined by the amount of money that you will have in your pocket if you sold your house today.

Here is an example:

Current appraised value of your house:Â Â Â Â Â Â Â Â $150,000
Less: 15% Margin for any depreciation:Â Â Â Â Â Â Â Â Â $22,500
Less: Amount you owe on your mortgage:Â Â Â Â $27,500
Your Home Equity Line of Credit:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $100,000

In the above example if you sold your house today, it will sell at a $150,000 and you still owe $27,500 for your mortgage, so the amount that is really yours, will be $122,500. To be safe, banks will reduce the available loan by a safety margin (15%, in our example). So, even if the price of your house goes down, the bank is cushioned.

The major factor determining the home equity line of credit is the market price of your house.

If the value of your house is goes up, you will have a lot more money available to you as your home equity line of credit. And if the value goes down, the available equity line of credit also goes down.

How is home equity line of credit like credit card debt?

Like credit card debt, home equity line of credit offers you a line of credit that you can access any time. So if your home equity line of credit has been determined as $100,000, you do not have to take out all the amount right at the start, or at specified intervals. You can use the money as and when you need it.

Your bank will extend this line of credit to you for a period of 10 to 15 years after which the terms and conditions will be renogitiated based on the market conditions.

Since a home is one of the biggest asset that most families have, the loan from a home equity line of credit should be used very carefully and wisely.