Home Equity Line of Credit

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What is the interest rate on a home equity line of credit loan?

Interest rates for loans differ, so it pays to check with several lenders for the lowest rate. Compare the annual percentage rate (APR), which indicates the cost of credit on a yearly basis. Be aware that the advertised APR for the home equity line of credit is based on interest alone. For a true comparison of credit costs, compare other charges, such as points and closing costs, which will add to the cost of your home equity line of credit loan. This is especially important if you are comparing a home equity line of credit with a traditional installment (or second) mortgage where the APR includes the total credit costs for the loan.

Ask about the type of interest rates available for the home equity plan. Most home equity lines of credit have variable interest rates. These variable rates may offer lower monthly payments at first, but during the rest of the repayment period the payments may change and may be higher. Fixed interest rates, if available, may be slightly higher initially than variable rates, but fixed rates offer stable monthly payments over the life of the credit line.

If you are considering a variable rate, check and compare the terms. Check the periodic cap, which is the limit on interest rate changes at one time. Also, check the lifetime cap, which is the limit on interest rate changes throughout the loan term. Ask the lender which index is used and how much and how often it can change. An index (such as the prime rate) is used by lenders to determine how much to raise or lower interest rates. Check the margin, which is an amount added to the index that determines the interest you are charged. Inquire whether you can convert your variable rate loan to a fixed rate at some future time.

Sometimes, lenders offer a temporarily discounted interest rate, called an introductory rate, that is unusually low and lasts for a short period time. During this time, your monthly payments are lower too. After the introductory period ends, your rate (and payments) increase to the true market level (the index plus the margin). Ask if the rate you are offered is discounted, and if so, find out how the rate will be determined at the end of the discount period and how much larger your payments could be at that time.

Some lenders allow you to convert from a variable interest rate to a fixed rate during the life of the plan, or to convert all or a portion of your line to a fixed term installment loan.

If you are thinking about a home equity line of credit, you might also want to consider a traditional second mortgage loan instead. A second mortgage provides you with a fixed amount of money repayable over a fixed period. In most cases the payment schedule calls for equal payments that will pay off the entire loan within the loan period. You might consider a second mortgage instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

References:
Federal Trade Commission (FTC)
www.ftc.gov

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