How you can avoid costly Home Equity penalties and fees

There are a few things to check for when evaluating your HELOC offer. Many details are often overlooked because people just don’t think about them. Glossing over the details can cost you money and restrict your future options. Use this checklist when evaluating your HELOC.

Minimum draw
The minimum amount you can withdraw for your HELOC.

What to look for:

Try to get this waived. This amount varies from HELOC to HELOC, but you don’t want to be forced take out more than you need. If you cannot get this waived, make sure the minimum amount is not too high.
Lender fees
The fees that the lender receives when the HELOC closes.

What to look for:

Don’t settle for a HELOC that makes you pay this. There are enough lenders out there that you can find a HELOC that doesn’t charge you this fee.
Introductory rate
The introductory or teaser interest rate before your HELOC adjusts.

What to look for:

You can use the low introductory rate to pay off debt on your HELOC. However, you probably won’t pay off all your debt at the introductory rate, so don’t be choose a HELOC based solely on the introductory rate.
Introductory period
The introductory period before your HELOC adjusts.

What to look for:

The more debt you can repay within the introductory period the better. However, you probably won’t pay off all your debt within the introductory period, so don’t choose a HELOC based solely on the introductory period.
Variable APR
The interest rate at which you repay your HELOC.

What to look for:

Make sure this is at or near the prime rate. Most HELOCs can offer rates near prime, so don’t accept a rate that will cost you more each month.
Margin
The points added onto your variable rate. The margin plus the prime rate equals your interest rate.

What to look for:

Most HELOCs will have a margin so shop around and try to find a HELOC with a reasonable margin.
Interest-only option
The option to pay interest only.

What to look for:

This can be a nice option if you find yourself in an emergency. You should plan to pay both principal and interest, but having the option of only paying interest may come in handy.
Required balance
A revolving balance that you are required to keep.

What to look for:

If the HELOC you are looking at has a required balance, look somewhere else. There’s no reason you should need to keep a balance and there are plenty of other HELOCs that don’t require this.
Cancellation fee
A fee charged when you cancel your HELOC.

What to look for:

If you refinance or sell your home, you don’t want to have an additional cost of a cancellation fee. Ask to have this removed or look for a HELOC that doesn’t charge you to cancel.
Annual fee
A yearly fee for your HELOC.

What to look for:

You should be able to find a HELOC that doesn’t charge you just to have it. Ask to have this removed or shop for one that doesn’t have an annual fee.
Periodic caps
The maximum amount of percentage points your HELOC can rise during each adjustment.

What to look for:

These are nice to have as they provide some protection against soaring interest rates. Try to get a reasonable periodic cap for your HELOC.
Lifetime caps
The maximum interest rate you will ever pay for your HELOC.

What to look for:

This provides some safety against soaring interest rates. Try to get a reasonable lifetime cap for your HELOC.
Inactivity fee
A fee associated with non-usage.

What to look for:

You shouldn’t be penalized for using your credit as needed. Try to get this removed or find another HELOC.

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