Home equity line of credit (HELOC) - 9 benefits you should look for

Different mortgage lenders package equity loans differently, according to their policies and borrowers' requirements.  So, what are the things you should look for in a good home equity line of credit (HELOC) that will benefit you the most?  Here are the 9 benefits that you should look for:

1.  No application fee, or the fee to be refunded at closing - Some lenders may want to make extra profit by charging you a fee that purports to cover their cost of processing your home equity line of credit (HELOC) application. This fee may also help them deter applicants who are not seriously interested.  If your lender charges you an application fee upfront, make sure that it is refundable at closing.  Otherwise, look for another lender.

2.  No appraisal or closing costs - The market value of your property is the key figure needed for determining your available equity in your property, since the home equity line of credit limit is a percentage of your available equity. Obviously, a mortgage lender will prefer a formal appraisal for arriving at the fair market value of your property. Owing to competition, some lenders are willing to use publicly available tax assessment data instead.  Thus, you will not have to bear the appraisal costs. Others may insist on a formal appraisal but absorb the appraisal costs to attract customers.  Therefore you should not accept any appraisal costs or any other closing costs.

3.  No account maintenance or check-writing fees - lenders are expected to encourage you to draw cash (borrow) from your line of credit because the more you borrow the more money they make from you. Most lenders make it as hassle-free as possible with free checks, and sometimes, even debit cards.  If you are charged for the privilege of having a equity line of credit (HELOC) checking account, find another lender.

4.  No "non-usage" fee - if you plan to use your line of credit (HELOC) sporadically, or want to reserve it for emergencies, make sure that your loan does not impose a non-usage fee.  Non-usage fees are fees that your lender charges you when you do not use your line of credit within a specific time period.  These fees have become less common, but some lenders still charge them.

5.  Variable interest rate equal to or near the prime rate - The only cost involved in a good home equity line of credit (HELOC) is the interest incurred on the outstanding balance.  Obviously, your goal is to get the lowest possible interest rate (the interest rate is commonly known as APR, ie annual percentage rate).  The APR is prime rate plus or minus a marginal percentage (eg 0.25%).  Some lenders offer low initial APR as a teaser that may suddenly increase after a brief introductory period, or that may be accompanied by special fees.  You should examine and understand the terms and conditions of your APR before you sign the loan agreement.

6.  Periodic cap on interest changes - a periodic cap limits the amount the interest rate can change at the time of each periodic adjustment.  A cap on interest rate is meant to protect you from large increases.  Your home equity line of credit (HELOC) interest rate, being variable, will change at some point as surely as the weather.  Therefore a periodic cap on your interest rate will be a great benefit to you in times of interest rate hike, as the hike will be limited by the stipulated periodic cap. Look for a home equity line of credit (HELOC) that adjusts quarterly (rather than monthly) in increments of 0.5% or less.

7. Lifetime cap on rate increases - a lifetime cap restricts the amount the interest rate can increase over the entire term of the loan.  You will want to find a home equity line of credit with a lifetime rate cap that you can live with.  Ask your loan officer to clearly spell out the "worst case" scenario for rate increases for the line of credit you are applying for.

8.  Option to convert to a fixed rate loan - look for a line of credit that gives you the option to convert the loan to a fixed rate loan, ie to convert your home equity line of credit into a home equity loan, so that you are protected from interest rate rise that makes you jittery.  You will probably not get an interest rate as favorable as a newly issued home equity loan, but you will not have appraisal or closing costs to pay if you convert.  However, take note that many lenders charge a fee for converting your HELOC to a home equity loan.

This is a useful feature to have when you are considering to choose between a home equity loan and a home equity line of credit.

9.  Interest-only payments allowed - you will have more flexibility if your equity line of credit allows you to pay only the interest and not the principal amount owed.  Of course, it is best to be disciplined to repay the principal amount regularly, but there may be unforeseen events that put you in financial difficulty temporarily eg job loss or other emergencies.  In these situations, it will be a great benefit to you if you have the flexibility to lower your line of credit repayment as much as possible, ie pay only the interest, without raising red flags at the credit rating agencies.

Keep in mind that your lender is not the only game in town. Lenders face keen competition in the market.  Shop around to find your best mortgage lender and a home equity line of credit that has most or all of these 9 benefits.  Also, there are many reputable online sources that can offer more competitive terms, because of their lower operating overheads, than your local bank. Look for these sources on this site.

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