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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