Not all HELOCs are created equal. If you don’t choose carefully, you could end up paying unnecessary fees or being charged a huge markup. This article shows you how to watch out for common lender “tricks” and negotiate the best HELOC rates and terms.
Determine the HELOC “Margin”
The margin should be your primary concern when shopping for a HELOC loan. Basically, the margin is the difference between the index rate and the interest rate the borrower will be charged. A large number of HELOC lenders use the prime rate as an index. Consider this example: if a borrower is given a 2% margin, he will always be charged 2 points above the prime rate. If the prime rate is at 4%, his interest rate will be 6%. If the prime rate is at 8%, his interest rate will be 10%.
Since HELOCs have adjustable rates, a borrower’s interest rate will be in flux throughout the life of the loan. The margin, on the other hand, will always stay the same.
Take note: the margin is not necessarily included in the HELOC’s APR. Many HELOC loans come with an introductory rate for the first few months. It is not uncommon for this introductory rate to be used in determining the APR. When the introductory period is over, the borrower will be charged the actual interest rate. Creditworthy borrowers can sometimes find HELOCs at the prime rate (0% margin). Those with poor credit may find that they are given an extremely high margin (6% in some cases).
The margin is not always published. To determine what your HELOC margin is, you must ask the lender .
Beware of Hidden HELOC Fees
It is possible to take out a HELOC without paying any fees at all. However, unexpected charges have a way of sneaking into loan documents. When applying for a HELOC, make sure that you won’t be responsible for these unnecessary fees:
HELOC application fee. Many lenders do not charge a fee for applying. If your lender does, they should be able to refund the money at closing.
Home appraisal charge. Someone has to pay for an appraisal to be done, but most lenders will absorb this cost themselves.
HELOC closing costs. Closing costs are common for many home loans, but not for the home equity line of credit. Don’t agree to pay closing costs, sometimes called “lender fees.”
HELOC check fees. You shouldn’t be charged extra every time you withdraw from your credit line – you’re already going to pay interest on the amount you take out.
HELOC annual fee. This line of credit will be open for 5, 10, or even 20 years. Annual fees can really add up – don’t get stuck paying extra money each year.
HELOC inactivity fee. If you choose to save your credit line for emergencies, don’t let the lender punish you. The inactivity fee can almost always be waived.
HELOC repayment penalty. You should never be penalized for paying off a line of credit before the end of
the term – that’s the beauty of choosing a credit line over a more traditional loan.
HELOC cancellation fee. It can be more difficult to get the cancellation fee waived, but it’s worth a shot. If your lender insists, you may be out about $500 should you choose to refinance or sell your home during the life of the HELOC.
Request Additional HELOC Features
Many home equity lines of credit come with “special features” that benefit the borrower. You may not be able to have everything on this list added to your HELOC. But, it’s worth it to ask.
Lifetime interest rate cap. This is the maximum amount that your interest rate can adjust to during the life of the loan. Don’t accept a cap that is so high you will not be able to make the monthly payment.
Periodic interest rate cap. Few HELOCs offer this feature, but it’s one to look out for. If you know that your interest rate can only adjust so high during a certain time frame (i.e. a year), you won’t be surprised by a skyrocketing bill.
Interest-only payments. Many HELOCs allow borrowers to make interest-only payments during the draw period. You may not want to use this feature regularly, but it’s good to have in case of emergency.
Fixed-rate conversion. A few lenders allow borrowers to convert withdrawals to a fixed interest rate. When you take out a sum of money, you can specify the preferred term of the fixed-rate loan (5 years, 10 years, etc). This is an especially comforting feature for borrowers concerned about rising interest rates.
Low introductory rate. Most HELOCs come with an introductory rate – the lower, the better.
Long introductory term. Try to push for a long introductory term. That way you’ll be able to maximize the benefits of the lower interest rate.
By familiarizing yourself with the basic features and fees involved in HELOC loans, you’ll be prepared to make smart choices for your financial future. Don’t be afraid to show your knowledge when talking to the lender – the more questions you ask, the more able you’ll become to make an informed decision.
Margin – The difference between the index rate and the interest rate the borrower will actually be charged. Many HELOC lenders use the prime rate as their index.
APR – The annual percentage rate. Most other loans use this number to show the total cost of the loan, including fees and points. When it comes to HELOCs the APR shows only the interest rate and does not account for additional costs.
Lifetime interest rate cap – The limit on how much an interest rate can go up during the life of the loan.
Periodic interest rate cap – The limit on how much an interest rate can go up during a set period of time (i.e. a year).
Introductory rate – A lower interest rate that is given to borrowers for a set amount of time during the initial months of their loan.