helocA HELOC (home equity line of credit) requires that you use your home as collateral. This may put your home at risk if you are late or cannot make your monthly payments. A HELOC can usually provide you with large amounts of cash at relatively low interest rates (since the loan is secured), and may also provide you with certain tax advantages unavailable with other kinds of loans.

A home equity loan can either be a revolving line of credit or a one-time, closed-end loan. Revolving credit lets you choose when and how often to borrow against the equity in your home. In a closed-end loan, you receive a lump sum for a particular purpose, such as remodeling or tuition.

The HELOC is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills, and not for day-to-day expenses. Home equity loans are available at lower interestrates than consumer loans, and are easier to qualify for since the loan is backed by the equity in your home. There are disadvantages of home equity loans, the primary being that you “use up” the equity that you have built up in your home which means it will take longer to pay off your home.

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. Many lenders set the HELOC by taking a percentage (say, 75 percent) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage.

A home equity loan will most likely permit you to borrow up to your credit limit whenever you want. Typically, you will use special checks. Under some plans, borrowers are able to use their credit card or other means to withdraw funds from thier credit line. The rate of interest for a home equity line credit changes, calculated on the value of an “index” usually based on U.S. Treasury Bills.

A HELOC typically incorporates a variable rather than fixed rate of interest. Variable-rate loans secured by a home must, by law, specify a ceiling (or cap) on how much the interest rate may rise over the life of the loan. Some variable-rate plans fix how much payments may increase, and how low interest rates may drop if interest rates fall.

A home equity line puts your home at risk. If the home concerned is your primary dwelling, the Truth in Lending Act gives you 3 days after signing to cancel the loan. You have the right to change your mind for any reason. Within the 3-day period, simply inform the lender in writing and the lender must cancel the contract, release all interest in your home, and return all fees paid to open the account, including any appraisal and application fees.

The Truth in Lending Act obliges lenders to disclose all the costs and important terms of their home equity loans, including the the payment terms, APR, miscellaneous charges, and any other information about variable-rate features. Until after you have received this information, no one (including the lender) may charge a fee.

If you are considering a HELOC, you might also want to consider a traditional second mortgage. A 2nd mortgage stipulates a fixed amount of money repayable over a fixed period, scheduling payments of equal amounts that will pay off the loan within a specified period. You might look into a 2nd mortgage instead of a home equity line of credit if, for example, you need a set amount for a special purpose, such as an addition to your home.

Negotiate with at least four (4) lenders. Don’t be afraid to make lenders and brokers compete for your business by letting them know that you’re shopping for the best deal. Ask each lender to lower the points, fees or the interest rate. And ask each to meet — or beat — the terms of the other lenders.

Financial contracts can be very confusing. Before signing yourself to a major long term commitment have an attorney, familiar with HELOC, financing and taxes, examine and explain the details (where the Devil is). A good tax finance attorney can save you many times his fee over the years, not to mention possible legal problems.

Back to the top of HELOC.