Home equity lines of credit are powerful financial tools. Understand the fine print before you sign.
In Rodgers and Hammerstein's The King and I, the character of Anna describes her newfound friendship with the King of Siam's family by singing "Getting to Know You." While this memorable show tune wasn't written to be associated with home mortgage products, it might as well be your mantra as you shop for a home equity line of credit (HELOC).
Mortgage lenders may have you believe that all HELOCs are created equal. And while it's true that all home equity lines adhere to a similar structure, there are some fine print differences that can cost you. When you're on the HELOC trail, pay special attention to the following aspects of your prospective equity lines.
It's acceptable to pay an application fee to a HELOC lender, as long as that fee is reimbursed to you at closing. Clarify how your lender handles the application fee before you write the check. If the fee isn't reimbursed, take your business elsewhere.
Account maintenance and check-writing fees
Be on the lookout for extra fees, such as those for annual account maintenance, check-writing, unused funds, etc. Stay on the hunt for a no-fee HELOC, but remember to consider the interest rate in the equation, too. If the no-fee HELOC carries a higher interest rate, it's only a better deal for you if you don't plan to borrow much.
Prepayment penalties can tie your hands when you want to pay off your HELOC balance. Avoid them. You never know when you might have the opportunity to restructure or transfer the debt. Credit cards occasionally offer low, fixed-rate balance transfers, for example. If it makes sense to pay off the HELOC, you should be able to do so without getting charged for it.
Early closing cost reimbursement
Most HELOC lenders will waive upfront closing costs, but some have a little thing called early closing cost reimbursement. This is another form of a prepayment penalty; if you close your HELOC within a certain timeframe, usually three years, the lender charges you for the previously waived closing costs.
Interest rate and adjustment schedule
If you have good credit, you should qualify for a HELOC that is at or near the prime rate. If you have great credit, you might find a HELOC that's actually priced below prime. In either case, try to find an equity line that adjusts quarterly and has a periodic rate cap.
You get the most flexibility from a HELOC that allows you to pay only the accrued interest each month, rather than a certain percentage of your outstanding principal balance.
Having HELOC borrowing power at hand can go a long way towards helping you achieve your financial goals. The trick is to find one that doesn't cost you too much for the privilege. Achieve that objective, and you, too, may be inclined to break out in song.