As a homeowner, you have probably received offers in the mail to apply for a home equity line of credit (HELOC) or a home equity loan (HEL). If handled properly, these types of loans can provide you with additional funds. To assure that you are getting the best deal, here are some tips you will want to consider before selecting the right loan program. Compare home equity rates.
- Avoid unnecessary fees. The market for home equity loans can be very competitive. When shopping for the best offer be aware of any application fees,closing costs, or appraisal fees which can drive up your actual costs. Find a home equity loan that does not penalize you if you decide to pay off your loan early, or one that does not charge you a check writing fee each time you access your home equity line of credit.
- Interest rate caps. Like a variable-rate mortgage, a HELOC is subject to change as interest rates fluctuate. This can work to your advantage should interest rates drop. However, be aware of how frequently your rate can adjust each year (e.g., quarterly is better than monthly.) Also look at the lifetime cap or maximum amount a rate can adjust each year.
- Try to avoid pre-payment penalties. Everyone wants to have the flexibility of paying off their home equity loan early. The reward is not only being debt free but saving on interest charges. Work with a lender who is willing to waive any pre-payment penalties or who gives you the flexibility to make interest-only payments in case you encounter a financial hardship.
- Ability to convert to a fixed rate. Since most HELOCs have variable ratesand can change at different times, what may seem like an attractive rate in the beginning may skyrocket later, should interest rates rise. Look for loan features that will allow you to convert to a fixed-rate loan should this happen.
- Shop for the best rates. Shop and compare for the best HELOC rates online. Be aware of low teaser rates which will escalate after the brief introductory period. Make sure you know the index and margin used to calculate the fully indexed rate. Determine if the rates you are comparing are competitive once all fees have been calculated.
- Bank on your relationships. Many financial institutions offer customers incentives, such as discounted interest rates, to maintain their banking relationship assuming certain requirements are met. Inquire with your current bank to see if they have such promotions available and check to see if you qualify.