6 Ways to Shop For Your Home Equity Line Of Credit

[Dec 14, 2008.]

 

1. Forget Rate, Think Margin
The interest rate on a Home Equity Line of Credit [HELOC] is typically calculated by the Prime Rate plus margin. In most advertisements or commercials, you'll most likely see an interest rate instead of the actual margin. But, the margin is what you should be focusing on. The prime rate is set by the Federal Funds Rate and can be found in the Wall Street Journal. The margin, however, is defined by the mortgage lender. So, if you're looking to get the best deal, it's best to compare margins instead of interest rates.

2. Disregard The Start Rate and Focus On Your Real Interest Rate
In addition to interest rates, you'll likely be quoted attractive introductory rates, or start rates. But, be sure to ask the lender if the rate you are being quoted is based on an introductory or adjustable margin. Some of these rates may only be good for three to six months. While the Prime Rate is subject to market conditions, banks can set margins to be adjustable or fixed for life. As a result, these temporary margins make their offers appear much more competitive. Ideally, you'd want to find a HELOC with minimal margins, and one that is fixed for the entire life of the loan.

3. Increased Loan Amounts Could Mean More Discounts
The loan amounts of HELOCs are typically less than traditional mortgages, so banks may reward you if you take out a larger line of credit on your home equity loan. Different banks will have different loan limit guidelines, but an example might be a .25% percent improvement if you took out a $200,000 line of credit as opposed to a $50,000 line of credit. But proceed with caution. While lower rates could save you money, a larger line of credit could tempt you into spending more than you initially planned.

4. Find Out The Minimum Draw Requirement
HELOCs are great for ongoing expenses such as home improvements or education expense. But even if you plan on just having the line of credit available for the future, some banks may hold a minimum draw requirement. Banks don't make their profits unless you are paying interest on the HELOC, so some might require you to have an initial draw or even maintain an average loan balance. If you're unsure if you need the money immediately, it's best to find out the mortgage lender's policy on these requirements. The last thing you want is to get penalized for not borrowing money you don't need.

5. Don't Make The Mistake of Treating Your Home Like an ATM
HELOCs can be very useful, but they can also get some homeowners into trouble. It's quite tempting to have tens of thousands or even hundreds of thousands of dollars in the form of a line of credit. But even if you have sufficient equity and leverage your home, it's important you don't treat your house as some cash cow. As an example, home prices could decline, and you might be trapped with negative equity because of your home equity loan.

6. Negotiate The Fees
A crucial step to finding the best HELOC is to compare fees with different lenders, and negotiate as much you can. Aside from the interest rate and margin, these fees can also be negotiated and worked out with your mortgage lender. Some common fees that are associated with HELOCs are upfront lender fees, annual maintenance fees, appraisal fees, closing costs, and cancellation or prepayment fees.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.