Is a home equity credit line for you?

Ifyou need to borrow money, home equity lines may be one useful source ofcredit. Initially at least, they may provide you with large amounts ofcash at relatively low interest rates. And they may provide you withcertain tax advantages unavailable with other kinds of loans. (Checkwith your tax adviser for details.)

At the same time,home equity lines of credit require you to use your home as collateralfor the loan. This may put your home at risk if you are late or cannotmake your monthly payments. Those loans with a large final (balloon)payment may lead you to borrow more money to pay off this debt, or theymay put your home in jeopardy if you cannot qualify for refinancing.And, if you sell your home, most plans require you to pay off yourcredit line at that time. In addition, because home equity loans giveyou relatively easy access to cash, you might find you borrow moneymore freely.

Remember too, there are other ways to borrow money from a lendinginstitution. For example, you may want to explore second mortgageinstallment loans. Although these plans also place an additionalmortgage on your home, second mortgage money usually is loaned in alump sum, rather than in a series of advances made available by writingchecks on an account. Also, second mortgages usually have fixedinterest rates and fixed payment amounts.

You also may want to explore borrowing from credit lines that do notuse your home as collateral. These are available with your credit cardsor with unsecured credit lines that let you write checks as you needthe money. In addition, you may want to ask about loans for specificitems, such as cars or tuition.

How much money can you borrow on a home equity credit line?

Dependingon your creditworthiness (your income, credit rating, etc.) and theamount of your outstanding debt, home equity lenders may let you borrowup to 85% of the appraised value of your home minus the amount youstill owe on your first mortgage. Ask the lender about the length ofthe home equity loan, whether there is a minimum withdrawal requirementwhen you open your account, and whether there are minimum or maximumwithdrawal requirements after your account is opened. Inquire how yougain access to your credit line -- with checks, credit cards, or both.

Also, find out if your home equity plan sets a fixed time -- a drawperiod -- when you can make withdrawals from your account. Once thedraw period expires, you may be able to renew your credit line. If youcannot, you will not be permitted to borrow additional funds. Also, insome plans, you may have to pay your full outstanding balance. Inothers, you may be able to repay the balance over a fixed time.

What is the interest rate on the home equity loan?

Interestrates for loans differ, so it pays to check with several lenders forthe lowest rate. Compare the annual percentage rate (APR), whichindicates the cost of credit on a yearly basis. Be aware that theadvertised APR for home equity credit lines is based on interest alone.For a true comparison of credit costs, compare other charges, such aspoints and closing costs, which will add to the cost of your homeequity loan. This is especially important if you are comparing a homeequity credit line with a traditional installment (or second) mortgage,where the APR includes the total credit costs for the loan.

In addition, ask about the type of interest rates available for thehome equity plan. Most home equity credit lines have variable interestrates. These variable rates may offer lower monthly payments at first,but during the rest of the repayment period the payments may change andmay be higher. Fixed interest rates, if available, may be slightlyhigher initially than variable rates, but fixed rates offer stablemonthly payments over the life of the credit line.

If you are considering a variable rate, check and compare the terms.Check the periodic cap, which is the limit on interest rate changes atone time. Also, check the lifetime cap, which is the limit on interestrate changes throughout the loan term. Ask the lender which index isused and how much and how often it can change. An index (such as theprime rate) is used by lenders to determine how much to raise or lowerinterest rates. Also, check the margin, which is an amount added to theindex that determines the interest you are charged. In addition,inquire whether you can convert your variable rate loan to a fixed rateat some future time.

Sometimes, lenders offer a temporarily discounted interest rate -- arate that is unusually low and lasts only for an introductory period,such as six months. During this time, your monthly payments are lowertoo. After the introductory period ends, however, your rate (andpayments) increase to the true market level (the index plus themargin). So, ask if the rate you are offered is "discounted," and ifso, find out how the rate will be determined at the end of the discountperiod and how much larger your payments could be at that time.

What are the upfront closing costs?

Whenyou take out a home equity line of credit, you pay for many of the sameexpenses as when you financed your original mortgage. These includeitems such as an application fee, title search, appraisal, attorneys'fees, and points (a percentage of the amount you borrow). Theseexpenses can add substantially to the cost of your loan, especially ifyou ultimately borrow little from your credit line. You may want tonegotiate with lenders to see if they will pay for some of theseexpenses.

What are the continuing costs?

Inaddition to upfront closing costs, some lenders require you to paycontinuing fees throughout the life of the loan. These may include anannual membership or participation fee, which is due whether or not youuse the account, and/or a transaction fee, which is charged each timeyou borrow money. These fees add to the overall cost of the loan.

What are the repayment terms during the loan?

Asyou pay back the loan, your payments may change if your credit line hasa variable interest rate, even if you do not borrow more money fromyour account. Find out how often and how much your payments can change.You also will want to know whether you are paying back both principaland interest, or interest only. Even if you are paying back someprincipal, ask whether your monthly payments will cover the full amountborrowed or whether you will owe an additional payment of principal atthe end of the loan. In addition, you may want to ask about penaltiesfor late payments and under what conditions the lender can consider youin default and demand immediate full payment.

What are the repayment terms at the end of the loan?

Askwhether you might owe a large payment at the end of your loan term. Ifso, and you are not sure you will be able to afford the balloonpayment, you may want to renegotiate your repayment terms. When youtake out the loan, ask about the conditions for renewal of the plan orfor refinancing the unpaid balance. Consider asking the lender to agreeahead of time and in writing to refinance any end-of-loan balance orextend your repayment time, if necessary.

What safeguards are built into the loan?