There
may be an introductory, or "teaser" rate
offered. This is a temporary rate which
will have little beneficial value
over the life of your loan. Since most
HELOCs are variable rate loans, the
rate you pay is the sum of the index plus
the margin.
Indices are expressed as rates
and include Prime and T-Bill rates. The
margin is explicitly stated in your
loan documents and is also expressed as
a percentage.
For example, if your
loan were tied to the Prime rate with
a 2% margin, and the Prime rate were
8%, you'd pay 10%. Historical information
regarding the behavior of various indices
is available on-line and at your local
library.
A little research will help
you determine which index you'd be most
comfortable with. Your variable rate plan will identify
a maximum interest rate (ceiling or cap).
Your loan may not exceed the rate cap during
the life of the loan under any conditions.
Consider a loan which allows amortization--repayment
in installments of principal and interest
sufficient to retire the debt by the end
of the plan. Try to amortize your loan,
otherwise, you may incur a balloon payment
at the end of the plan.
Negative Amortization
Under certain circumstances, depending
on your program, the monthly payments may
not adjust adequately to fully account
for interest rate increases. In this event,
negative amortization may occur.
Negative
amortization is when in which your loan
balance increases. If this condition is
a possibility with your loan, discuss with
your lender how you can avoid it.
Some lenders may permit you to convert
a variable 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.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.
Borrow Wisely
Perhaps you discover you can borrow much
more than you expected, or need. A HELOC
may seem to turn your home into a new type
of credit card. If you default on a credit
card, you may only damage your credit.
If you default on a HELOC, you could lose
your home. |