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The
following is important information pertaining to our Home Equity Line
of Credit program. Here, you have the opportunity to read and print
the following important information before proceeding to the application
by selecting the Accept button at the bottom of this page. By continuing,
I/We certify that we have access to a printer and have had the opportunity
to print the important information below.| Appraisal of home | $100,000 |
| Percentage x | 75% |
| Percentage of appraised value | $75.000 |
| Less mortgage debt | - $40,000 |
| Potential credit line | $35,000 |
In determining your actual credit line, the lender also will consider
your ability to repay, by looking at your income, debts, and other
financial obligations, as well as your credit history.
Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the plan may allow you to renew the credit line. But in a plan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance. Others may permit you to repay over a fixed time, for example 10 years.
Once approved for the home equity plan, usually you will be able
to borrow up to your credit limit whenever you want. Typically, you
will be able to draw on your line by using special checks.
Under some plans, borrowers can use a credit card or other means to
borrow money and make purchases using the line. However, there may
be limitations on how you use the line. Some plans may require you
to borrow a minimum amount each time you draw on the line (for example,
$300) and to keep a minimum amount outstanding. Some lenders also
may require that you take an initial advance when you first set up
the line.
What should you look for when shopping for a plan?
If you decide to apply for a home equity line, look for the plan that
best meets your particular needs. Look carefully at the credit agreement
and examine the terms and conditions of various plans, including the
annual percentage rate (APR) and the costs you'll pay to establish
the plan. The disclosed APR will not reflect the closing costs and
other fees and charges, so you'll need to compare these costs, as
well as the APRs, among lenders.
Interest Rate Charges and Plan Features. Home equity plans typically
involve variable interest rates rather than fixed rates. A variable
rate must be based on a publicly available index (such as the prime
rate published in some major daily newspapers or a U.S. Treasury bill
rate; the interest rate will change, mirroring fluctuations in the
index. To figure the interest rate that you will pay, most lenders
add a margin, such as 2 percentage points, to the index value. Because
the cost of borrowing is tied directly to the index rate, it is important
to find out what index and margin each lender uses, how often the
index changes, and how high it has risen in the past.
Sometimes lenders advertise a temporarily discounted rate for home
equity lines-a rate that is unusually low and often lasts only for
an introductory period, such as six months.
Variable rate plans secured by a dwelling must have a ceiling (or
cap) on how high your interest rate can climb over the life of the
plan. Some variable-rate plans limit how much your payment may increase,
and also how low your interest rate may fall if interest rates drop.
Some lenders may permit you to convert a variable rate to a fixed
interest rate during the life of the plan, or to convert all or a
portion of your line to a fixed-term installment loan.
Agreements generally will permit the lender to freeze or reduce your
credit line under certain circumstances. For example, some variable-rate
plans may not allow you to get additional funds during any period
the interest rate reaches the cap.
Costs to Obtain a Home Equity Line
Many of the costs in setting up a home equity line of credit are
similar to those you pay when you buy a home. For example:
- A fee for a property appraisal, which estimates the value of your home.
- An application fee, which may not be refundable if you are turned down for credit.
- Up-front charges, such as one or more points (one point equals one percent of the credit limit).
- Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes.
- Certain fees during the plan. For example, some plans impose yearly membership or maintenance fees.
- You also may be charged a transaction fee every time you draw on the credit line.
You could find yourself paying hundreds of dollars to establish the
plan. If you were to draw only a small amount against your credit
line, those charges and closing costs would substantially increase
the cost of the funds borrowed. On the other hand, the lender's risk
is lower than for other forms of credit because your home serves as
collateral. Thus, annual percentage rates for home equity lines are
generally lower than rates for other types of credit. The interest
you save could offset the initial costs of obtaining the line. In
addition, some lenders may waive a portion or all of the closing costs.
How will you repay your home equity plan?
Before entering into a plan, consider how you will pay back any money
you might borrow. Some plans set minimum payments that cover a portion
of the principal (the amount you borrow) plus accrued interest. But,
unlike the typical installment loan, the portion that goes toward
principal may not be enough to repay the debt by the end of the term.
Other plans may allow payments of interest alone during the life of
the plan, which means that you pay nothing toward the principal. If
you borrow $10,000, you will owe that entire sum when the plan ends.
Regardless of the minimum payment required, you can pay more than
the minimum and many lenders may give you a choice of payment options.
Consumers often will choose to pay down the principal regularly as
they do with other loans. For example, if you use your line to buy
a boat, you may want to pay it off as you would a typical boat loan.
Whatever your payment arrangements during the life of the plan-whether
you pay some, a little, or none of the principal amount of the loan-when
the plan ends you may have to pay the entire balance owed, all at
once. You must be prepared to make this balloon payment by refinancing
it with the lender, by obtaining a loan from another lender, or by
some other means. If you are unable to make the balloon payment, you
could lose your home.
With a variable rate, your monthly payments may change. Assume, for
example, that you borrow $10,000 under a plan that calls for interest-only
payments. At a 10 percent interest rate, your initial payments would
be $83 monthly. If the rate should rise over time to 15 percent, your
payments will increase to $125 per month. Even with payments that
cover interest plus some portion of the principal, there could be
a similar increase in your monthly payment, unless the agreement calls
for keeping payments level throughout the plan.
When you sell your home, you probably will be required to pay off
your home equity line in full. If you are likely to sell your house
in the near future, consider whether it makes sense to pay the up-front
costs of setting up an equity credit line. Also keep in mind that
leasing your home may be prohibited under the terms of your home equity
agreement.
Comparing a line of credit and a traditional second mortgage loan.
If you are thinking about a home equity line of credit you also might
want to consider a more traditional second mortgage loan. This type
of loan provides you with a fixed amount of money repayable over a
fixed period. Usually the payment schedule calls for equal payments
that will pay off the entire loan within that time. You might consider
a traditional second mortgage loan 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.
In deciding which type of loan best suits your needs, consider the
costs under the two alternatives. Look at the APR and other charges.
You cannot, however, simply compare the APR for a traditional mortgage
loan with the APR for a home equity line because the APRs are figured
differently.
The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges.
The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.
Disclosures from Lenders. The Truth in Lending Act requires lenders
to disclose the important terms and costs of their home equity plans,
including the APR, miscellaneous charges, the payment terms, and information
about any variable-rate feature. And in general, neither the lender
nor anyone else may charge a fee until after you have received this
information. You usually get these disclosures when you receive an
application form, and you will get additional disclosures before the
plan is opened. If any term has changed before the plan is opened
(other than a variable-rate feature), the lender must return all fees
if you decide not to enter into the plan because of the changed term.
When you open a home equity line the transaction puts your home at
risk. For your principal dwelling, the Truth in Lending Act gives
you three days from the day the account was opened to cancel the credit
line. This right allows you to change your mind for any reason. You
simply inform the creditor in writing within the three-day period.
The creditor must then cancel the security interest in your home and
return all fees-including any application and appraisal fees-paid
in opening the account.
Glossary
Annual membership or participation fee.
An amount that is charged annually for having the line of credit available.
It is charged regardless of whether or not you use the line.
Annual percentage rate (APR).
The cost of credit on a yearly basis expressed as a percentage.
Application fee.
Fees that are paid upon application. An application fee may include
charges for property appraisal and a credit report.
Balloon payment.
A lump-sum payment that you may be required to make under a plan when
the plan ends.
Cap.
A limit on how much the variable interest rate can increase during
the life of the plan.
Closing Costs.
Fees paid at closing, including attorneys' fees, fees for preparing
and filing a mortgage, for taxes, title search, and insurance.
Credit limit.
The maximum amount that you can borrow under the home equity plan.
Equity.
The difference between the fair market value (appraised value) of
your home and your outstanding mortgage balance.
Index.
The base for rate changes that the lender uses to decide how much
the annual percentage rate will change over time.
Interest rate.
The periodic charge, expressed as a percentage, for use of credit.
Margin.
The number of percentage points the lender adds to the index rate
to determine the annual percentage rate to be charged.
Minimum payment.
The minimum amount that you must pay usually monthly) on your account.
In some plans, the minimum payment may be "interest only."
In other plans, the minimum payment may include principal and interest.
Points.
A point is equal to one percent of the amount of your credit line.
Points usually are collected at closing, and are in addition to monthly
interest.
Security interest.
An interest that a lender takes in the borrower's property to assure
repayment of a debt.
Transaction fee.
A fee charged each time you draw on your credit line.
Variable rate.
An interest rate that changes periodically in relation to an index.
Payments may increase or decrease accordingly.
Where To Go for Help.
The following federal agencies are responsible for enforcing the federal
Truth in Lending Act, the law that governs credit term disclosure
for home equity lines. Any questions concerning compliance with the
act by a particular financial institution should be directed to its
enforcement agency.
State Member Banks of the Federal Reserve System
Division of Consumer and Community Affairs Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
(202) 452-3946
National Banks
Compliance Management
Office of the Comptroller of the Currency
250 E Street, S.W
Washington, D.C. 20219
(202) 874-4428
Federal Credit Unions
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314
(703) 518-6360
Federally Insured Non-Member State Chartered Banks and Savings Banks
Office of Consumer Affairs
Federal Deposit Insurance Corporation
550 Seventeenth Street, N.W.
Washington, D.C. 20429
(800) 424-5488; (202) 898-6005
TDD (800) 452-3151; (202) 898-6726
Federally Insured Savings and Loan Institutions and Federally Chartered Savings Banks
Consumer Programs
Office of Thrift Supervision
1700 G Street, N.W., Fifth Floor
Washington, D.C. 20552
(202) 906-6237
Mortgage Companies
Division of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
601 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
(202) 326-3233
Check List
Ask your lender to help fill out this check list.
Basic Features Plan A Plan B
Fixed annual percentage rate
Variable annual percentage rate
Index used and current value
Amount of margin
Current rate
Frequency of rate adjustments
Amount/length of discount (if any)
Interest rate caps
Length of plan
Draw period
Repayment period
Initial fees
Appraisal fee
Closing costs
Application fee
Repayment Terms
During the draw period
Interest and principal payments
Interest only payments
Fully amortizing payments
When the draw period ends
Balloon payment
Renewal available
Refinancing of balance by lender
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