TEN Features of a good Home-Equity Line of Credit

With house prices having quadrupled in the last ten years, home equity line of credit is a route most home owners have used to improve financial flexibility, provide readily available cash reserves for emergencies, or pay for large expenses such as college tuition, that dream holiday or home improvements. Nevertheless, you have to be aware that not all home equity line of credit offer the same advantages. If you decide that home equity line of credit is best for your situation, what features should you look for? Here are ten factors to be considered when making your choice:

#1. Ensure that there are no appraisal or closing costs - The market value of your property is key factor in determining the amount equity line of credit you will be offered. Some lenders are willing to use publicly available tax assessment data in lieu of formal appraisals. Others may absorb appraisal costs to attract customers. The fact is due to fierce competition, there are enough no-cost options available so there is no need to settle for a home equity line of credit lender that charges appraisal costs or closing costs or any other costs for that matter

#2. Ensure there's no application fee - As mentioned before the home equity line of credit market is very competitive, thus there is no need to use a lender who charges your simply for applying. Should you choose a lender that charges an application fee in order to help cover their costs of processing or deter time wasters, make sure it is refundable at closing.

#3. Ensure there is no account maintenance or check-writing fees - Lenders are out to make as much money as possible at your expense. Most lenders make it as hassle-free as possible with free checks and, sometimes, even debit cards. If your lender charges fees for the privilege of having a home equity line of credit checking account, find another one.

#4. Flexibility to convert to a fixed rate loan - This helps when rates do rise, as you are able to convert your variable-rate debt to a fixed one. This is an important useful feature to look for in an equity line of credit - the ability to convert the line of credit to a standard fixed-rate, fixed-term home equity loan. Bear in mind that you are not likely to get an APR as favorable as a newly issued loan, but you also won't have appraisal or closing costs to pay if you convert. Nevertheless, note that many lenders charge a fee for converting to a fixed rate loan.

#5. Ensure that the variable APR rate is equal to or near the prime rate - The only cost involved with a good home equity credit line should be APR interest charged on the balance borrowed. Your goal as a borrower is to get the lowest possible APR. Most lenders use the "prime rate" as a base index and charge you an APR equal to prime plus or minus a marginal percentage, for instance 0.30%. Search for the best rate available, but be aware of low APR rates that are available only for a short period, say 6 to 12 months after which the true APR kicks in. In additon the periodic and lifetime caps on rate changes are also as important as the initial rate

#6. Read carefully the periodic cap on interest rate changes - Virtually all home equity line of credit are variable rate loans meaning that the initial APR rate will change at any time depending on future base rates. It is important to understand how often the rate can adjusted and how much the rate can be adjusted at one time. Rate falls are to your advantage, but important risk you face is when rates are rising. Look for a home equity line of credit that adjusts quarterl instead of monthly in increments of 0.5% or less. With expectations of rising interest rates, many lenders appear to be eliminating the periodic rate cap feature and raising lifetime caps to legal limits. Home equity line of credit that incorporates relatively low rate ceilings are rarer these days

#7. Ensure that there are no "non-usage" fees - The market value of your property is key to determining the amount of your credit line. As mentioned before, some lenders use publicly available tax assessment data in lieu of formal appraisals. Others absorb appraisal costs to attract customers. Either way, there are enough no-cost options available that you should not have to settle for lender that charges home equity line of credit appraisal costs or any other closing costs.

#8. Allows interest-only payments - For a savvy borrower, it is usually best to make regular principal payments on your home equity line of credit balance. However, unforseen circumstances such as a job loss or other emergency can make it a challenge to keep up payments. In these situations, it is critical to have the flexibility to lower your payment as much as possible without increasing your loan balance or raising red flags at the credit rating agencies.

#9. Unrestricted ability to repay principal without penalty - On the other hand, you also want the flexibility to pay down principal on the loan when you choose. You may get a bonus from your job that you want to apply to the loan or you may find a 0 APR balance transfer offer that is worth taking advantage of. In any case, a key component of a good home equity line of credit is the unfettered ability to repay principal.

The best advice is to shop around till you find a home equity line of credit with many, if not all of these features. Keep in mind that your bank is not the only home loan lender available. Brokerage firms, credit card companies and mortgage bankers have all entered the market and offer competing products. Credit unions typically offer excellent terms and should not be overlooked. There are many reputable on-line sources that have lower overhead costs and may be able to offer better terms than the local bank.

#10. Lifetime cap on rate increases (the amount that the rate can be adjusted over the loan's life) - A good home equity line of credit is something you will want to keep for some time. Interest rates have been at relatively low levels for a number of years, but it wasn't too long ago that normal APR on loans was 15%. The point is that interest rates over time can rise dramatically. A home equity line of credit loan with a lifetime rate cap that you can live with is important. Be clear as to what the "worst case" scenario will be and if you will be comfortable with it before applying

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