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Home Equity Loans and Lines of Credit 101 (HELOC)

Tips To Consider If You Do Take A Home-Equity Loan Or Credit Line

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If you decide to borrow against the equity in your home:

  • Find out if you can get credit life insurance on the debt.  If you can, you will increase the value of your estate by the amount of the life insurance.
  • Decide whether you want the cash now or just want to have it available as a line of credit for whenever needed.  If you don't need all the money now, or only need it for certain regular expenses (such as annual property taxes), or because of potential future health expenses, credit lines may be better. They will save you money since you don't start paying interest until you actually borrow each chunk of money.
  • Minimize fees:
    • If you only want a standby credit line, look for a loan that doesn't charge closing costs or other up-front fees. 
    • Borrow only the amount you need.
    • Avoid lenders who impose annual maintenance fees. 
    • As with a first or second mortgage, consider both the fees and interest rates when choosing a lender.  Sometimes a lower rate can be more expensive if it comes with higher fees.
    • Watch out for other fees, including:
      • Prepayment penalties.
      • Closing costs.
      • Lifetime rate caps: If the interest rate on the home-equity loan is variable, make sure you could afford the payments that would result from the highest interest rate you can be charged.
      • Inactivity fees:  Make sure there's not a fee if you don't use a credit line for a certain period of time, such as a year.
  • Comparison shop for the lowest rates and fees.  In addition to your local banks, check out what is available on the internet such as offsite link and offsite link. If you can find one, it is particularly advantageous for a person with higher expenses due to medical expenses to take out a loan which only requires payment of interest and not principal for a period of time. This is particularly the case if when the repayment changes to contain both interest and principal (the amount you borrowed), the interest rate is fixed. (If interest at that point is lower, you can likely refinance. It is higher, you are protected because your rate is locked in.)

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