Finding the right deal for you
With the huge rise in home values in the past few years, bankers are competing seriously for new home-equity debt, so there are plenty of excellent deals to be found, but you will need to shop around to find the best deal for you.
You should be able to find a bank that's offering a loan with NO closing costs. This means that the bank will pick up the cost of the appraisal and document handling, which includes a credit check, title search, and similar charges. Be careful of lenders that state you don't have to pay anything at closing. This could be different than NO closing costs. Basically, they may charge you closing costs but include them in the home equity loan so it appears that you are not paying them because you don't pay anything at closing.
Even though there may be no closing costs, look at the fine print to see if there are annual fees associated with the deal or if you're obligated to repay closing costs if you shut down the credit line within a year without selling your home.
For those not comfortable with variable rates, banks offer loans with convertible features. That means if the prime rate goes down, your rate does too. If the prime goes up, you have the option of converting the balance of the loan or line of credit to a fixed-rate loan at the present rate. There should be no additional charge for this conversion. If your home equity loan carries a fixed rate already, there are some banks that offer to reset the rate once during the life of the loan at no extra charge.
Remember that whatever terms you choose, you're putting your home up as collateral; if you can't repay, you could lose your home. Compare each loan according to these points:
- Payment terms. These should be spelled out clearly. For example, you might be told that your line of credit is good for ten years, with a minimum monthly payment of $100 or 1/360 of the loan balance plus finance charges, whichever is greater. At the end of this ten-year draw period, you would have another five years to pay any remaining balance. Minimum terms during the repayment period would be 1/60 of the outstanding balance plus finance charges.
- Payment example. You must be given an example of what the minimum monthly payments would be if you borrowed a certain amount -- say, $10,000 -- and the interest rate reached its maximum level.
- Lenders' fees. These could include loan-application fees (typically around $150), one or more "points" (each at 1% of your credit limit) and a maintenance fee (often $75 or so).
- Third-party fees. Fees usually include amounts for home appraisals, credit reports and legal fees, and might total between $500 and $900.
- Rate features. Over 80% of home-equity loans are pegged to the prime rate. Lenders currently add one to three points to this rate to come up with their index rate. Should you encounter an equity line pegged to some other index, ask the lender to provide you with an historical example showing how changes in the index rate in the past would have affected minimum payments due on the home-equity loan compared with what you would have experienced with a loan tied to prime.
- You must also be told about any annual or lifetime rate caps that apply. The index must be one that is out of the lender's control. Banks aren't allowed to use their own cost of funds as an index or change the index at their discretion.
After you commit yourself, you have three business days to back out of the loan if your principal residence serves as collateral.