Fees and closing costs

The fees that you pay for opening an equity account are similar to the ones you pay when you buy a home. The fees can total 2 percent to 5 percent of the loan and are for such things as: • property appraisal;
 
• application; 
• title search; 
• attorney or title agent; and
• document preparation.
 

The most common fee levied on a credit line is for an appraisal or other estimate of the property's value. Sometimes, instead of paying an appraiser to visit the house and compare it to other nearby homes of similar value, the lender accepts a computerized estimate called an automated valuation model, or AVM. Or a real estate agent might estimate the value in what is called a broker's price opinion, or BPO. AVMs and BPOs cost less than full appraisals.

Other fees and interest
The biggest cost you will pay on an equity loan or a credit line is the interest. Home equity loans usually have fixed rates, and credit lines usually have variable rates. If you get an equity loan on the same day that your neighbor gets a home equity line of credit (HELOC), your rate will be higher than your neighbor's. Over time, your neighbor's HELOC rate can rise higher than what you pay on the equity loan, but your rate never changes.

Some lenders offer "teaser" rates that are artificially low for a few months, then adjust to normal levels. The variable rate of a HELOC moves up and down with another rate, called an index. Most banks index HELOC rates to the prime rate or the prevailing yields on Treasury notes.

The lender adds a margin, or fixed number of percentage points, to the index to determine the new rate each time it is adjusted. For example, a HELOC might use the prime rate as an index, with a margin of 1 percentage point. If the prime rate is 3 percent, the HELOC's rate is 4 percent (the 3 percent prime plus 1 percent margin). If prime rises to 3.5 percent, the HELOC's rate will rise to 4.5 percent. Adjustments can be made monthly, quarterly or annually.

Variable-rate loans have a cap on how high the interest can climb over the life of the loan. Most variable-rate lines of credit also have a cap that limits how much, and how often, the interest rate can change during the course of a year. This cap typically prevents the rate from jumping more than two percentage points in a year. Some plans require a minimum monthly payment. Chart out how high your payments would be at different rates by going to Bankrate.com's mortgage calculator or ask your banker to do it for you.

Credit lines sometimes have other fees attached to them, such as annual maintenance charges, transaction fees each time you use the account, or inactivity fees if you don't use the account. Both types of equity debt may be subject to prepayment penalties, which are charged if you pay off or close the account within two or three years.

If you expect to sell the house within a couple of years, don't get an equity account with a prepayment penalty.

Tips

 Check out rates in Bankrate.com's survey of home equity rates and compare.
 Ask the lender what the lifetime and periodic caps are.
 Find out if there is a minimum payment.
 Understand what index is used, what the margin is, and how often the lender adjusts rates.
 Ask whether there is a balloon payment -- a requirement that the entire balance is due in a lump-sum payment after a few years.

Understand that you cannot compare the annual percentage rate -- the cost of the loan each year, expressed as a percentage -- of a home equity loan against a home equity line of credit. They are calculated differently. The APR for a fixed-term equity loan takes into account the interest rate plus points and other finance charges. For a line of credit, the APR is based on the periodic interest rate and does not include points and other costs.

Electronic payments sometimes get you a fractional break on interest rates. Before you sign, consult a tax adviser about deductions on your loan because there are exceptions to deductibility.

 
High Recommended Books


1. 

Mortgages For Dummies, 2nd Edition by Eric Tyson and Ray Brown (Paperback - Aug 27, 2004) Buy new:$11.55    50 Used & new thwi stsco a no wndo ditcre ent.paym es.lin entsPar fI aym uryo veha derlen a esdo otl rgecha fo esfe ityequ ot ni enop eirth a wno ditcre es.hom neli eyTh n'tdo anc leru apt uto atth atth ityequ ferof thwi ately;immedi a ybema e-eqhom from $7.45 Excerpt - page 12: "... to deduct the interest costs on second mortgages known as home equity loans or home equity lines of credit, HELOCS, (see Chapter 6) ..."

2. 

The Insider's Guide to Home Equity Borrowing by Pete Hitesman (Paperback - April 2004) Buy new: $21.95

3. 

10 Secrets to Successful Home Buying and Selling: Using Your Housing Psychology to Make Smarter Decisions by Lois A. Vitt (Paperback - Nov 12, 2004) Buy new:$13.46    52 Used & new from $5.13 Excerpt - page 17: "... to stay in her own community. She obtained a generous se rback(Pape nda - singclo arM tsAcos 92 meho 01)20 ityequ uyB anlo 78 new:$14. ostalm sp;&nb aysalw 83 riescar edUs esfe mp;&a nda ewn singclo omfr ts.cos .65$1 nyMa derslen erptExc n'tdo - rgecha gepa esfe 7:12 ro ..". singclo home- equity loan and commuted more than a IOO miles a day to ..."

4. 

Stop Sitting on Your Assets: How to Safely Leverage the Equity Trapped in Your Home and Transform It Into a Constant Flow of Wealth and Security by Marian Snow (Hardcover - Mar 15, 2007) Buy new:$15.61    9 Used & new from $14.68 Excerpt - page 165: "... used up their small savings and tried to get a home equity loan, but no bank would lend to an unemployed applicant. He ..."

5. 

The New Reverse Mortgage Formula: How to Convert Home Equity into Tax-Free Income by Tom Kelly (Paperback - Mar 1, 2005) Buy new:$14.96    26 Used & new from $7.50 Excerpt - uyB anlo 78 new:$14. ostalm sp;&nb aysalw 83 riescar edUs esfe mp;&a nda ewn singclo omfr ts.cos .65$1 nyMa derslen erptExc n'tdo - rgecha gepa esfe 7:12 ro ..". singclo thwi stsco a no wndo ditcre ent.paym es.lin entsPar fI aym uryo veha derlen a esdo otl rgecha fo esfe ityequ ot ni enop eirth a wno ditcre es.hom neli eyTh n'tdo anc leru apt uto atth atth ityequ ferof thwi ately;immedi a ybema e-eqhom page 29: "... In a traditional, forward mortgage, the borrower starts with little equity in the home and a large loan balance. ..."

6. 

How a Second Home Can Be Your Best Investment: New, Tax-Free Methods for Using a Vacation Home for Recreation, Retirement...AND Investment! by Tom Kelly and John Tuccillo (Paperback - Mar 19, 2004) Buy new:$12.89    59 Used & new from $4.25 Excerpt - page 4: "... (Perhaps the down payment comes from a home equity loan on your primary residence). 2. For most of the year, ..."

7. 

So You Want to Refinance: An Insiders Guide to Refinancing Adjustable Rate Mortgages and Home Loans by Kristina, Benson (Paperback - Sep 20, 2006) Buy new: $19.95    20 Used & new from $18.98 Excerpt - w:$14. ostalm sp;&nb aysalw 83 riescar edUs esfe mp;&a nda ewn singclo omfr ts.cos .65$1 nyMa derslen erptExc n'tdo - rgecha gepa esfe 7:12 ro ..". singclo thwi stsco a no wndo ditcre ent.paym es.lin entsPar fI aym uryo veha derlen a esdo otl rgecha fo esfe ityequ ot ni enop eirth a wno ditcre es.hom neli eyTh n'tdo anc leru apt uto atth atth ityequ ferof thwi ately;immedi a ybema e-eqhom page 6: "... By mid 2004, Americans owed $766.2 billion on home equity loans and lines of ..."

8. 

Who Says You Can't Buy a Home! by David Reed (Paperback - May 30, 2006) Buy new:$14.00    65 Used & new from $3.79 Excerpt - page 26: "... With such demand, naturally home values increased. When home values increase, homeowners accrue equity not by paying down the loan and regaining their principal, but by the appreciation in home ..."

9. 

How to Buy a House with No (or Little) Money Down, 3rd Edition by Martin M. Shenkman and Warren Boroson (Paperback - Mar 29, 2001) Buy new:$14.78    38 Used & new from $1.65 Excerpt - page 127: "... with a down payment. Parents may have a lot of equity in their own homes. They can tap that equity with a home-equity loan and provide their children with money to use toward the ..."