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Things to Know Before You Take Out a Home Equity Line of Credit

A HELOC, or a Home Equity Line of Credit, offers a great way to utilize the equity in your home. People often use HELOCs to pay for expenses that are large or that have high rates of interest, since HELOCs usually have low interest rates. For instance, HELOCs are often used to pay for college loans, home improvements, medical bills, vacations, and higher-rate debt (credit cards, car loans, etc.).

Having never opened a home equity line of credit myself, I found myself having to learn a lot about them last month. Through January 31st, Premier Members is  offering a 2.99% APR* on HELOCs, and I was assigned the task of creating posters and flyers for the branches. If you also don’t know much about HELOCs, you will find this online article extremely useful, if a bit long. It explains everything from how the rate for a HELOC is determined, to what sort of fees to look out for, to repayment schedules, etc. For a condensed version, read below.

Home equity lines of credit usually come with a variable interest rate based on a publicly available index (such as the prime rate published in the Wall Street Journal) plus a “margin,” such as 2 percentage points. It is important to know which index will be used and how often the prime rate will be adjusted on your line (quarterly is better than monthly if the prime rate is increasing). Financial institutions will often offer a discounted rate for a home equity line of credit that lasts for a short period of time. For instance, homeowners who apply and qualify for Premier Members’ 2.99% APR* will get that rate through June 30, 2012, at which point it will adjust back to the regular Wall Street Journal Prime + Qualifying Margin.

When trying to decide where to open your home equity line of credit, don’t forget to compare fees in addition to comparing the annual percentage rates (APR). Fees may include: appraisal fee for your home, application fee, closing costs, annual fees, and up-front charges such as points (1point equals 1 percent of the credit limit). The cost of fees can erase the benefit of opening a smaller line of credit, so try to find a financial institution that waives most or all of the fees.

Repayment options vary, with some plans allowing payments of interest only and some including a portion of the principal. Although interest-only may seem great, keep in mind that many home equity lines of credit require that the entire balance owed must be paid when the plan ends. If you borrow $10,000, you will owe the full amount when the plan ends. If you are unable to make this payment, then you could lose your home. Plan wisely so you can pay off your line of credit.

I hope you found this information helpful! If you have comments or questions, please leave them below.

*Promotional Annual Percentage Rate  of 2.99% is good for new qualifying HELOCs only. Application must be received no later than 1/31/12. Variable rate and subject to change quarterly  on the first day of the month. No closing costs for those loans under $100,000 and with a minimum closing advance of $10,000. Standard underwriting guidelines apply. The promotional rate will end on 06/30/12, and your rate will adjust to the original qualifying rate of the Wall Street Journal Prime + The Qualifying Margin as of the date of the adjustment.