Taking out a home equity line of credit can be a confusing process. Unlike a personal loan, which isn’t backed by collateral, a home equity line of credit (or HELOC) is secured with the equity you have built up in your house. With your home and credit on the line, you want to be sure that you have a complete understanding of how your HELOC works before signing on any dotted line.
To give you an idea of what sort of things you should be on the lookout for, we spoke to Amplify Credit Union’s Real Estate Loan Agent Supervisor, Alex Rodriguez. Here’s what we learned about finding the perfect lender and line of credit by asking the right HELOC questions.
Seven HELOC Questions Every Borrower Should Ask
If you’re planning on taking out a home equity line of credit, you’ll want to ask your lender some questions to get an idea of what your total costs will be. The government heavily regulates lenders offering home equity loans and lines of credit. “We have to disclose the details of transactions, so there is not much we can leave out,” Rodriguez says. These regulations mean that banks and credit unions are legally required to answer questions like the ones below.
What is the introductory rate and period?
An introductory rate is the interest rate a lender will charge in the initial stages of a loan. The introductory period is the amount of time that this rate is in effect. Introductory rates are commonly used to make loans seem more attractive to borrowers, so be sure to inquire about the rate once that period is over.
What is the margin?
If you have a variable interest rate HELOC, the rate you pay will be determined by two factors: the index and the margin. The index is a financial indicator that financial institutions use to set standards on consumer loan products. Most lenders in the United States use the U.S. Prime Rate found in the Wall Street Journal as the index for HELOCs. This index is subject to fluctuation.
The margin, on the other hand, is constant throughout the life of the HELOC. The bank or credit union determines its margin. Your total interest rate is the index plus the bank’s margin.
What is the minimum draw requirement?
A minimum draw requirement is a set amount that you must withdraw from your line of credit, typically at closing. Texas requires a minimum draw of at least $4,000 for a home equity line of credit.
What is the average balance I am required to keep?
Some lenders require a minimum average balance, meaning you cannot wholly repay the HELOC during the draw period. Keep in mind that you will have to pay interest each month on whatever balance you have.
What are all the closing costs?
“Closing costs” is the collective name used for the fees and expenses that borrowers must pay before loan funds are disbursed. The closing costs for a HELOC will be similar to those that you pay for a home mortgage. General closing costs include:
- Processing and underwriting fees
- Application fees
- Appraisal fees
- County recording fees
- Escrow and title fees
- Flood certification
- Credit report and history check
On average, closing costs for a home equity line of credit will range from 2% to 5% of the total loan amount. Sometimes lenders will offer a “no-fee” home equity line of credit and cover these costs.
What is my annual fee?
An annual fee is a set amount that a lender may charge yearly for keeping your account open. Sometimes this can be as little as a $5 membership fee or cost you upwards of $250.
Is there a cancellation fee?
Also called an early payoff or early termination fee, a cancellation fee is something lenders can charge if you close your line of credit before a specified date. These penalties may be imposed as a set amount or a percentage of the total loan amount.
Borrowing money costs more than the interest rate on the principal balance. The answers to these seven questions will give you a complete understanding of your home equity line of credit and what you can expect to pay for the loan.
How to Find the Best HELOC Lender
When borrowing money, there’s more to consider than the loan itself. Keep in mind that many things will be the same across lenders. “It’s tough to find some bad lender practices since HELOCs are heavily regulated,” Rodriguez says.
However, you want to be sure that you’re working with a financial institution that puts the customer first. When vetting a lender, Rodriguez says to inquire about the following:
- What is your application process? Am I able to apply online on a secure portal?
- What documentation do you require? Do you provide a secure portal for these files?
- How much time do you need to fund?
- How do I access my funds?
- Will you be the only person that will be working with me?
- What is my out-of-pocket cost for the transaction?
- Are there prepayment penalties for paying the loan offer sooner?
- Which type of loan is best for me?
The lender’s answers to these questions should help guide you in your ultimate decision to take out a line of credit at that financial institution. A bank that doesn’t put it’s customers first will fail to have safeguards in place like secure portals or charge an arm and a leg in hidden fees.
Just because home equity lending is a regulated industry doesn’t mean that you should take out a credit line without questioning the lender or details of a loan. By asking lenders the questions outlined in this article, you’ll enter the financial transaction with a better understanding of your costs and benefits.