Fees and Common Uses for HELOCs
A home equity line of credit is a secured loan whereby the borrower’s home serves as collateral. Borrowers are allowed to draw on their discretion once the financial institution establishes a maximum balance.
Do Your Homework
Before choosing a HELOC, it is important to ask lenders whether the loan comes with a fixed or variable interest rate. Most financial institutions offer a fixed interest rate. Inquire about the frequency of rate adjustments, the current value and index used, and the amount of margin. You can ask about the repayment and draw period and the floor and interest rate cap. There are also fees to consider, including closing costs, upfront charges, and application and appraisal fees. The repayment terms are another factor to consider. Ask whether you will be making fully amortizing, interest-only, or principal and interest payments during the draw period. When it is over, can you refinance and is renewal possible? Ask whether you have to make a balloon payment.
Do You Need HELOC
Basically, a HELOC is a type of revolving credit offered to homeowners. They can use the money to pay for medical bills and hospital stays, home improvement projects, tuition, room and board, etc. This type of line of credit is not suitable for covering day-to-day expenses. Most lenders establish a credit limit by subtracting the outstanding mortgage balance from a percentage of the property’s value. If the percentage is 70 and the property’s value is $200,000, the appraised value is $140,000 ($200,000 x 0.70 percent). Let’s say that the outstanding balance on the mortgage is $65,000. The credit limit will be $75,000 ($140,000 - $65,000). Financial institutions take different factors into account when determining the credit limit. These include past and current debts, income level, credit and payment history, and ability to pay the interest and principal balance.
In addition, financial institutions may impose some restrictions on how to use the HELOC. You may have to keep an outstanding balance or draw a minimum amount, i.e. $200. With some lenders, borrowers are required to take an advance once the line of credit is set up.
Benefits
One of the main benefits of using a home equity line of credit is that it comes with a low interest rate. HELOCs are offered with a rate that is based on the prime rate. There are no fees for drawing on the credit line and no check writing and maintenance fees. Another advantage is that financial institutions don’t charge closing costs. Tax deductibility is an important factor to consider. In addition, borrowers can convert the line of credit to a fixed rate loan. Home equity loans with fixed interest rates and terms are a better option when the prime rate increases. Even when the prime rate goes up, HELOCs usually have caps on how much the rate can increase. It is best to opt for a product that comes with a lifetime cap. Moreover, borrowers can repay the amount borrowed at a time of their convenience. They can close the loan at any time.
Fees
While some financial institutions advertise no closing costs, others charge fees for mortgage filing and preparation, title insurance and title fees, and attorney fees. The costs are similar to that of taking out a mortgage loan. Applicants often pay property appraisal fees for an inspection intended to determine the value of their house. Borrowers may have to pay an application fee, which is non-refundable if the application is rejected. Some lenders also charge transaction, maintenance, and annual membership fees. This depends on the plan of choice. Even if there are fees to pay, home equity lines of credit come with low interest rates that offset the costs of maintaining a HELOC. Some financial institutions also waive all or some of the closing costs. Note that full repayment is required if you decide to sell the property that serves as collateral.
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