A home equity line of credit (HELOC) is one of the most popular and affordable ways for homeowners to borrow money. The interest rates are low, you can borrow money as you need and most borrowers can deduct the interest they pay on their taxes.
Still, there's a lot of difference in the rates and terms among the various HELOCs that lenders are offering. To cut through the clutter, here are five tips to help you find the best HELOC for you.
1 - Shop carefully
HELOCs are adjustable-rate loans, where the interest rate fluctuates according to market conditions, so you need to know how those rates are determined. The rate you pay is based on an index, usually the prime rate, that reflects the underlying cost of credit and varies over time. On top of that is added a margin (a percentage added onto the base rate), which gives you the interest rate you pay.
Start off by calling a variety of different lenders, and check online sites, to get information. Make a list so that you can compare what each bank offers side-by-side. Take a piece of paper, and get ready to compare.
The first section should include the basic features of each HELOC. Make columns for the annual percentage rate, the index used, the amount of the margin, the frequency interest rate adjusts, and the interest-rate cap (how much and how quickly your interest rate can change).
You’ll also want to compare the draw period, the repayment period, and the various fees, including ones for the appraisal, application, and closing costs, plus any ongoing fees charged on an annual basis.
Finally, list all the possible repayment terms. These should include when the repayment period begins, if a balloon payment is required, if the loan coverts to a fixed-rate during the repayment phase and if renewal or refinancing is allowed by the lender.
2 - Don’t be afraid to haggle
If one lender offers a good rate with closing fees, but another offers no closing fees, don’t be afraid to ask your preferred lender for a better deal. They may say no, but if you don’t ask, you don’t even give yourself a chance.
3 - Watch out for teaser rates
Some lenders will advertise HELOCs with very low rates, or fixed rates, just to draw you in, or “tease” you to become a customer. However, after a certain period of time, those rates will revert back to their higher counterparts. Make sure that the rates you are being quoted are for the entire term of the loan.
4 - Get the draw information
Since each bank has its own policy, make sure that you fully understand how each bank operates. If you need money quickly, you might want to withdraw funds during the closing, since it may be a few weeks before you get your checks or the credit card that’s connected to your account.
5 - Stay conscious
Make sure that you can handle the payments, even if the interest rate hits its cap. Discipline is essential when you have a HELOC.
If you withdraw the total amount, you won’t have any more credit available. And worse, if you have a huge outstanding balance when the draw period ends, you may need to pay it all at once.
If you don’t have the funds on hand – and it’s likely you don’t if you’re applying for a HELOC – you may need to do a mortgage refinance or take out another HELOC. If you’re in a tough lending environment, this may not be possible, and you run the risk of losing your home.
A HELOC can be an affordable and financially savvy way to borrow money, but you want to be a smart shopper to be sure of getting a good deal for yourself.