Finding the Hidden Fees in HELOCs
Life is all about taking the good with the bad. With a home equity line of credit (HELOC), just make sure that your home loan has more good than bad when you're comparing potential lenders.
The devil is in the details. For mortgage lenders, so is the profit. With the home equity line of credit (HELOC), there are a number of ways a lender can make money that may not be immediately apparent to a borrower. These details are generally woven into a loan's fine print, so you'll need to watch out for them when you're HELOC shopping.
Margin call
The primary way a lender makes money on a HELOC is by charging a margin. The margin is the amount that's added to the prime rate to determine your mortgage rate. Normally, your margin stays the same throughout your loan. But in sometimes, a lender may offer a lower introductory rate with temporarily reduced margin as an enticement.
After the initial period – generally six months to a year – the regular margin kicks in, adjusting the rate upward, even if the prime rate hasn't changed. The interest rate is still based on the prime, but you may not know exactly what the margin will be unless you inquire about it beforehand.
When you're shopping for a HELOC, always ask about the margin. Factor this in as you collect quotes from a number of different parties.
To TIL the truth
With every mortgage, a lender is required to disclose a Truth in Lending (TIL) statement. The TIL discloses the exact cost of the loan. For many homeowners, this is an excellent way to determine precisely how much your mortgage will cost you. For HELOC borrowers, the issue is slightly cloudy. The TIL makes no disclosure of margins. You can't rely on the document for an apples-to-apples comparison, so don't trust it. You'll need to ask the lender directly about it.
See no evil
Lenders are notorious for sliding in a few fees here and there, with many of them occurring the year after you've closed the loan. For example, a lender may entice you into closing on a loan by not including any closing or appraisal costs. However, the next year, you may discover on a statement that you've been charged an annual fee. Be sure that you know all the fees before you make a move.
These types of devilish details tend to leave a bad taste in borrowers' mouths. To be fair, this is how lenders make their money. You can expect to pay some sort of costs during the course of the loan. Just be sure to check in all the known places where fees and hidden costs tend to hide. Find them, and you'll find a way to get yourself a more affordable HELOC.
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