Written by Sean Pollock

Sunday, 11 October 2009 06:25

Home Equity Line of Credit or briefly HELOC is a line of credit which offers low interest rates and uses your home equity as collateral. It offers a flexible and convenient way to borrow against the equity that you have accumulated in your home. Lines of credit have two major differences from Home Equity Loans (HEL). First, a HEL provides you with a lump sum, versus a HELOC, which allows the borrower to take only as much credit as needed, up to the maximal approved limit, i.e. works much like a credit card. In this way, you don't have to take more credit than you need today, and have the rest of the line conveniently available with no extra paperwork. Second, HELOC comes with adjustable interest rates, while with Home Equity Loans you can choose either fixed or adjustable interest rate. Thus, shopping for a HELOC is not the same as shopping for a loan, or mortgage. To make sure you get the best deal, follow these easy steps.

1) Look beyond the introductory rate. In some cases, HELOC comes with an introductory interest rate that is “guaranteed” for some time: usually not more than 6 months. After that, your rate will become variable, calculated as the prime rate plus margin. Never assume that your margin is a difference between an introductory rate and the prime rate. Do not compare loans only by their introductory rates, either.

2) Know your margin. Margin is the most important feature of your loan because your variable rate is nothing else but the prime rate plus margin. It is best to directly inquire about the margin before you commit yourself to a loan.

3) Mind the fees. There may be one-time fees and repeating fees. One-time fees could apply at the time you open your line of credit, or when you are done with it. Especially, watch out for fees that apply when you close the account prematurely (i.e. if you will have to sell your house sooner than planned). In addition, watch for periodic fees, such as annual fees and fees for not borrowing enough money, and a so called pre-payment penalty, a fee for paying your debt faster than agreed. All the extra fees effectively increase the interest rate you pay for your loan.

4) Don’t let your credit line decide for you how much to borrow. The main advantage of HELOC is that you borrow as you need. Some plans, however, come with a minimal draw at closing and/or with a minimal average loan balance that you have to maintain. These features reduce flexibility of your credit line and may put you in the position when you are obligated to borrow even if you don’t need the loan. Make sure that the line of credit you choose serves your needs best.

Armed with this four-step comparison plan, you can shop for your HELOC confidently.