Three Important Features of a Home Equity Line of Credit

Have you been considering a home equity line of credit (HELOC)? There is a lot of information out there about HELOCs, and sorting through all of it can feel overwhelming. You already know financial decisions like this should not be taken lightly; that’s why, at Amegy Bank, we’re here to help you evaluate your options. We’ve made a brief list of three important HELOC features you should consider before applying:

  1. HELOC interest rate charges and margins

    HELOCs have a variable interest rate, which means the rate will adjust with changes in the index to which it’s tied. Borrowers will then face the prime rate, plus a margin. The margin is an amount added to the prime rate to determine what your interest rate will be after the introductory period ends. 

    There are different factors in determining your margin, but the major ones are credit score and the amount of equity supporting the HELOC. The Wall Street Journal Prime Rate in 2016 is 3.50%, and a typical margin for borrowers with good credit is around 2 points. This would potentially make for a total interest charge of 5.50%, but of course this may be different depending on the HELOC and your own financial specifics.
  2. HELOC minimum draw limits

    Generally speaking, a HELOC has a 30 year term, which includes a draw period and a repayment period. The draw period is typically the first 5 to 10 years, followed by the repayment period which lasts 10 to 20 years. During a draw period, the you can take out as much money as you would like within the credit line amount. During this time you can make interest-only payments on the amount taken out.

    Usually, lenders will require a minimum amount that you have to take out before closing. This is called a minimum draw. The minimum draw amount usually applies through the draw period. For example, you may need to advance at least $300 from your line of credit to avoid a fee. The amount varies by your lender, but you should make sure the minimum amount is not too high. You don’t want to take out more money than you need or pay a fee for not meeting the required minimum draw amount.
  3. HELOC costs and fees

    There are certain fees (closing costs) associated with opening a HELOC that you should be aware of from the beginning. Though these can vary by lender, closing costs are relatively small and typically cost between 0–3% of the loan amount. Examples of these costs could be application fees, appraisal fees and credit report fees. Be sure to refer to your lender’s Home Equity Line of Credit Disclosure for exact details.

    Some of these HELOC costs and features may seem expensive and complicated, but they may also be worth it in the long run. If used wisely, HELOCs provide a low-cost solution (compared to high interest rates like credit cards) to costs that you wouldn’t otherwise be able to afford or fund, like home improvements, educational costs and emergency medical expenses.We’re here to help you every step of the way as you look into using a HELOC. 

The information provided is meant for general informational purposes only and does not constitute tax, business or legal advice.

Sources:

http://www.mtgprofessor.com/A%20-%20Second%20Mortgages/how_do_you_shop_for_a_heloc.htm

http://www.bankrate.com/rates/interest-rates/wall-street-prime-rate.aspx

http://www.thetruthaboutmortgage.com/home-equity-line-of-credit-heloc/

http://www.bankingmyway.com/real-estate/home-equity/why-heloc-rates-are-looking-good

http://www.realtor.com/advice/costs-associated-home-loan/

http://www.realtor.com/advice/ask-7-questions-get-best-heloc/

http://www.myfico.com/loancenter/homeequity/step4/avoidpenalties.aspx