Home equity rates
More and more lenders are giving home equity lines of credit. It is worth noting that by using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. In addition, under the tax law--depending on your specific situation--you may be allowed to deduct the interest because the debt is secured by your home.
Theoretically speaking if you are in the market for credit, a home equity plan may be right for you. Or perhaps another form of credit would be an ideal proposition. Before making a decision, it is pivotal that you should weigh carefully the costs of a home equity line against the benefits. It is quite mandatory that you shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And always remember that failure to repay the amounts you've borrowed, plus interest, could mean the loss of your home.
It is worth mentioning in this regard that a home equity line of credit is a form of revolving credit in which your home serves as collateral. Due to the simple fact that home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items like education, home improvements, or medical bills and not for day-to-day expenses.
Moreover, with a home equity line, you will be approved for a specific amount of credit--your credit limit, the maximum amount you may borrow at any one time under the plan. More often than not lenders set the credit limit on a home equity line by taking a percentage (say, 65 percent) of the home's appraised value and subtracting from that the balance owed on the existing mortgage.
It is worth pointing that in determining your actual credit limit, the lender will also consider your ability to repay, by looking at your income, debts, and other financial obligations as well as your credit history. In simple terms, many home equity plans set a fixed period during which you can borrow money, such as 5 years. Always remember that at the end of this "draw period," you may be allowed to renew the credit line. On the other hand if your plan does not allow renewals, you will not be able to borrow additional money once the period has ended. In theory, few plans may call for payment in full of any outstanding balance at the end of the period. Others may give you an option of repayment over a fixed period (the "repayment period"), for example, 15 years.
Once you are given a nod of approval for a home equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. Normally, you will use special checks to draw on your line. Though under some packages, borrowers can use a credit card or other means to draw on the line.
It is worth noting that there may be limitations on how you use the line. Few plans may need you to borrow a minimum amount each time you draw on the line (for example, $200) and to keep a minimum amount outstanding. On the other hand some plans may also require that you take an initial advance when the line is set up.
In case if you decide to apply for a home equity line of credit, look for the plan that best meets your particular needs. It is of utmost importance to read the credit agreement carefully, and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs of establishing the plan. Fact of the matter is the APR for a home equity line is based on the interest rate alone and will not reflect the closing costs and other fees and charges, so you'll need to compare these costs, as well as rate charges and related plan features.
Furthermore, home equity lines of credit typically involve variable rather than fixed interest rates. It is pivotal that the variable rate must be based on a publicly available index as is the case with the prime rate published in some major daily newspapers or a U.S. Treasury bill rate. In addition, the interest rate for borrowing under the home equity line changes, mirroring fluctuations in the value of the index.
Majority of lenders cite the interest rate you will pay as the value of the index at a particular time plus a "margin," such as 2 percentage points. Due to this simple fact the cost of borrowing is tied directly to the value of the index, it is important to find out which index is used, how often the value of the index changes, and how high it has risen in the past as well as the amount of the margin.
Theoretically speaking, lenders sometimes offer a temporarily discounted interest rate for home equity lines--a rate that is unusually low and may last for only an introductory period, such as 6 months. Moreover, variable-rate plans secured by a dwelling must, by law, have a ceiling (or cap) on how much your interest rate may increase over the life of the plan. It is worth remembering that some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop.
Few lenders give you an option to convert from a variable interest rate to a fixed rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan. According to experts, plans normally permit the lender to freeze or reduce your credit line under certain circumstances. For instance, some variable-rate plans may not give you a power to draw additional funds during a period in which the interest rate reaches the cap. Fact remains that many of the costs of setting up a home equity line of credit are similar to those you pay when you buy a home.
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