Saturday, May 07, 2005
4. No "non-usage" fees - The market value of your property is key to determining the amount of your credit line. Some lenders are willing to use publicly available tax assessment data in lieu of formal appraisals. Others may absorb appraisal costs to attract customers. Either way, there are enough no-cost options available that you should not have to settle for HELOC lender that charges appraisal costs or any other closing costs.
5. Variable APR equal to or near the prime rate (adjusted quarterly) - The only cost involved with a good home equity credit line should be interest charged (APR) on the balance borrowed. As with any loan, the borrower's goal is to get the lowest possible APR. Most lenders use the "prime rate" as published in the Wall Street Journal (or other publication) as a base index and charge you an APR equal to prime plus or minus a marginal percentage (e.g. 0.25%). Search for the best rate available, but be aware of low "teaser" rates that may suddenly change after a brief introductory period or be accompanied by special fees. Also, keep in mind that the periodic and lifetime caps on rate changes are as important as the initial rate (see below).
6. Periodic cap on interest rate changes (the amount that the rate can be changed at one time) - Virtually all HELOC's are variable rate loans meaning that the initial interest rate (APR) will change at some point as surely as the weather. A key is to understand how often the rate can adjust and how much the rate can be adjusted at one time. Of course, when rates are falling the larger and faster the change, the better for you. But more important is the upside risk you face when rates are rising. Look for a HELOC that adjusts quarterly (rather than monthly) in increments of 0.5% or less. Note: with expectations of rising interest rate