How To Choose a Home Equity Loan Company

The following factors should be considered as you decide which home equity product best
suits your  needs:

 Interest Rates. The most expensive cost of any home
equity product is interest. The interest rates on both
home equity products are generally similar. Know the
interest rates and APR's to compare a loan with a
credit line. Home equity loans are available with either fixed or variable rates. Home equity credit lines usually have variable interest rates, however a few offer fixed rates. A fixed rate means the that rate is  established in the contract and will not change. You have the security of knowing the exact amount that
must be paid each month.

A variable rate loan means that the interest rate can  change in response to a designated economic indicator, such as the prime rate. With a variable rate, an increase  in interest rates affects the monthly payment. Either the amount of the monthly payment goes up or the term of the loan is increased. The
financial institution can help you chart out what would
happen to your  payment at different interest rates.

APR:
The Truth in Lending Act's
Regulation Z   requires that lenders disclose the
Annual Percentage  Rate (APR) in all home equity
products. The APR includes all the costs of credit, such as interest rate,  points or other finance charges. This regulation makes  it much easier for you to compare the different home equity products.

Other Financing Costs. Three common costs include application fees, points and closing costs. These costs  will make a big difference in the total cost of your loan. Application fees cover the cost of processing  your application, such as appraisal or
title fees and credit check. These costs are
somewhere between $25  to $300. Some financial institutions do not charge application fees but they do include these charges in  the closing costs.

Points are service fees that are added on to all home
equity loans and a few home equity lines. They are  figured on the total amount of the loan or credit line and are paid at closing. One point equals one percent
of the loan amount or credit line, for example, for a
$40,000 loan or equity line of credit, one point would
equal $400. You need to know how many points are
added on to the costs. Some lenders add or subtract
points for a lower or higher interest rate.

Closing costs cover appraisal, title, recording and
insurance fees. Financial institution fees vary, so
compare lenders. Request an itemization of the closing  fees at least one week before the
closing to avoid surprises. Estimate 2 to 5% of the
home equity product  for closing costs.

Tax Deductible:
 The loan or credit line is tax deductible if it will improve your home or property,
with specific limitations and exclusions.

Term:
Home equity loans can run from 3 to 20 years, while credit lines typically run for 5 to 20 years. When
you reach your credit limit, you must stop borrow and start repaying. The financial institutions generally give you 10 to 20 years to repay the debt. A line of credit may be divided into borrowing and repayment
periods. Some lenders will give you the option to take lower payments with a final balloon payment. You should agree to a balloon payment only if you know  that you will sell your house before the end of the repayment period or know that you will be able to pay the balance of the debt before the end of the re- payment period.

Right of Rescission: 
This right is part of the Truth in Lending Act and gives you three days from the day the account was opened to cancel the home equity product for any reason. However, you must inform the lender in writing within the three-day period and the lender must return all fees paid to open the account.

Foreclosure:
With either a home equity loan or credit  line, when the debt is in default, the lender can foreclose on your house and property. The foreclosure process varies from state to state, but generally takes from 2 to 18 months. The foreclosure process on a home equity loan or line of credit differs from  foreclosure on a first mortgage. The home equity  products would be  re- paid after the first mortgage is paid in full.

Terms and Conditions:
When shopping for any home equity product, read the application information and contract carefully because
the rates, terms and conditions will vary from lender to
lender. Some of the following terms and conditions
may not be suited to your needs or could add extra
costs to your home equity product.

Introductory or Teaser Rates: 
Because of competition in the marketplace, some
lenders offer what are called "teaser rates". This
would be rates lower than the prime rate, usually one
to two points, for a short period of time, usually 6
months.

Caps:
The cap will specify the maximum percentage that a rate can increase. Caps are a very good way to protect yourself from high interest rates.

Index: 
Variable interest rates are tied to an index. The index is an independent rate upon which the changes in your loan rate will be based. The most common
indexes used are the prime rate or Treasury bill rate. It
is helpful to know how often the index changes and
how high it has risen in the past as a possible indicator of future rate changes.

Zero Closing Costs: 
When the financial institution offers zero closing costs, you could be responsible for all these costs, around $200 to $300,  if you close your line or sell your house within a year.

Convertible Loans:
This feature is for home equity products with variable interest rates. Consumers tend to be concerned about having little control over the interest rates. In response to this concern, some financial institutions offer convertibility features. For example, it may be possible for borrowers to adjust rates on both fixed rate home equity loans and variable rate lines of credit. You could be offered a "teaser rate" for the first 6 months; such as the prime rate minus two points. After 6 months if the prime rate goes down, so does your rate. If the rate goes up, you have the option of converting your loan or line into a fixed rate loan at the going rate.

Another option allows consumers with a fixed rate loan at a high rate to convert their loan for no extra
charges, one time, when the rates go down.
 
Loans Within Lines: 
Some lenders allow consumers to separate their credit line into as many as three fixed rate loans with terms from 15 to 25 years. The interest rate will become the going rate for fixed-rate loans on the day you change.

Margin: 
The margin is included in the APR and is the index plus one to three percentage points. Each percentage point adds to the total cost of credit, so look for fewer points.

Repayment Features: 
Find out if there is a pay back feature that would allow you to either refinance or extend your debt for another period of time.

Transaction Fee: 
These fees may be charged every time you draw on the credit line or if you do not use your credit line during a 12 month period.

Application Fee: 
These fees would cover the initial costs of application, such as property appraisals and credit reports.

Cancellation Fee: 
If you pay the entire balance of the  loan or credit line during the first 12 or 24 months, you could be required to pay this fee.

Annual Membership or Participation Fees:
A yearly fee charged just to use the credit line. They can be negotiated.

Conditions That Would Make The Home Equity Product Frozen or Due:
Situations, such as losing your job or a good credit rating, which would permit  the lender to freeze or reduce your credit line.

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