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Home Equity Lines of Credit and Best Second Mortgage

A home equity line of credit is a very popular way to get additional funds to make major purchases, pay for education, medical bills or home improvement. Your home becomes collateral so it is very important to understand all the risks and select the best credit terms. Here are some useful tips for those looking for an opportunity to establish the second line of credit.

First of all, estimate the amount you will be able to borrow. Most lenders calculate your credit limit by taking a certain percentage of your home's appraised value and subtracting it from the current balance on your first mortgage. The financial institution will also consider your credit history, income and financial obligations.
Second, carefully compare all the options available. Examine the APR (Annual Percentage Rate), set-up and closing fees and other charges. Most lenders offer deals with variable rates based on publically available index. Different indexes might be used by different institutions so you need to find out which one will determine the APR in your case.
Sometimes you might be offered an introductory period with lower APR or a fixed rate. Be prepared that your APR will change depending on the change of the index used.

Third, evaluate the costs of different home equity credit lines available. There is a significant number of charges you will have to pay such as a fee for estimating the value of your home, an application fee, upfront charges and closing costs. Some banks require you to pay additional maintenance or transaction charges.
The last but not least, make a plan of how you will repay the loan. Some banks require you to pay a minimum monthly payment. However, unlike if you have a second mortgage loan, making only minimum payments might not be enough to pay off the debt by the end of the term. Another option is to pay only the interest accrued to the principal. Thus by the end of the term you will have paid only the interest. So the best solution is to pay more than the minimum payment required by the agreement.

Another issue you should be aware of is the permission: financial institutions have to reduce or freeze your line of credit in case the value of your home declines significantly. In this situation you can always talk to your lender and ask to restore your credit line or shop for another line of credit.
Applying for a home equity line of credit is a serious step. Consider all the options, estimate the risks and choose the type of loan that suits your needs. The easiest way to do it is to compare HELOC rates online. You can always find something that works for you, so compare the deals and apply online.

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