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Home Equity Line of Credit

Using a credit line to borrow against the equity in your home has become a popular source of consumer credit. And lenders are offering these home equity credit lines in a variety of ways.

You will find most loans come with variable interest rates, some come with attractive low introductory rates, and a few come with fixed rates. You also may find most loans have large one-time upfront fees, others have closing costs, and some have continuing costs, such as annual fees. You can find loans with large balloon payments at the end of the loan, and others with no balloons but with higher monthly payments.

No one loan is right for every homeowner. The challenge, then, is to contact different lenders, compare options, and select the home equity credit line best tailored to your needs.

Be sure to review the home equity contract carefully before you sign it. Do not hesitate to ask questions about the terms and conditions of your financing. To help you do this, you may want to consider the following questions and to use the checklist at the end of this brochure. (We apologize that the checklist is not available on-line.

If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates. And they may provide you with certain tax advantages unavailable with other kinds of loans. (Check with your tax adviser for details.)

At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. And, if you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more freely.

Remember too, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your home, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed payment amounts.

You also may want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money. In addition, you may want to ask about loans for specific items, such as cars or tuition.

Depending on your creditworthiness (your income, credit rating, etc.) and the amount of your outstanding debt, home equity lenders may let you borrow up to 85% of the appraised value of your home minus the amount you still owe on your first mortgage. Ask the lender about the length of the home equity loan, whether there is a minimum withdrawal requirement when you open your account, and whether there are minimum or maximum withdrawal requirements after your account is opened. Inquire how you gain access to your credit line -- with checks, credit cards, or both.

Also, find out if your home equity plan sets a fixed time -- a draw period -- when you can make withdrawals from your account. Once the draw period expires, you may be able to renew your credit line. If you cannot, you will not be permitted to borrow additional funds. Also, in some plans, you may have to pay your full outstanding balance. In others, you may be able to repay the balance over a fixed time.

Interest rates for loans differ, so it pays to check with several lenders for the lowest rate. Compare the annual percentage rate (APR), which indicates the cost of credit on a yearly basis. Be aware that the advertised APR for home equity credit lines is based on interest alone. For a true comparison of credit costs, compare other charges, such as points and closing costs, which will add to the cost of your home equity loan. This is especially important if you are comparing a home equity credit line with a traditional installment (or second) mortgage, where the APR includes the total credit costs for the loan.

In addition, ask about the type of interest rates available for the home equity plan. Most home equity credit lines have variable interest rates. These variable rates may offer lower monthly payments at first, but during the rest of the repayment period the payments may change and may be higher. Fixed interest rates, if available, may be slightly higher initially than variable rates, but fixed rates offer stable monthly payments over the life of the credit line.

If you are considering a variable rate, check and compare the terms. Check the periodic cap, which is the limit on interest rate changes at one time. Also, check the lifetime cap, which is the limit on interest rate changes throughout the loan term. Ask the lender which index is used and how much and how often it can change. An index (such as the prime rate) is used by lenders to determine how much to raise or lower interest rates. Also, check the margin, which is an amount added to the index that determines the interest you are charged. In addition, inquire whether you can convert your variable rate loan to a fixed rate at some future time.

Sometimes, lenders offer a temporarily discounted interest rate -- a rate that is unusually low and lasts only for an introductory period, such as six months. During this time, your monthly payments are lower too. After the introductory period ends, however, your rate (and payments) increase to the true market level (the index plus the margin). So, ask if the rate you are offered is "discounted," and if so, find out how the rate will be determined at the end of the discount period and how much larger your payments could be at that time.

When you take out a home equity line of credit, you pay for many of the same expenses as when you financed your original mortgage. These include items such as an application fee, title search, appraisal, attorneys' fees, and points (a percentage of the amount you borrow). These expenses can add substantially to the cost of your loan, especially if you ultimately borrow little from your credit line. You may want to negotiate with lenders to see if they will pay for some of these expenses.

In addition to upfront closing costs, some lenders require you to pay continuing fees throughout the life of the loan. These may include an annual membership or participation fee, which is due whether or not you use the account, and/or a transaction fee, which is charged each time you borrow money. These fees add to the overall cost of the loan

As you pay back the loan, your payments may change if your credit line has a variable interest rate, even if you do not borrow more money from your account. Find out how often and how much your payments can change. You also will want to know whether you are paying back both principal and interest, or interest only. Even if you are paying back some principal, ask whether your monthly payments will cover the full amount borrowed or whether you will owe an additional payment of principal at the end of the loan. In addition, you may want to ask about penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment.

Ask whether you might owe a large payment at the end of your loan term. If so, and you are not sure you will be able to afford the balloon payment, you may want to renegotiate your repayment terms. When you take out the loan, ask about the conditions for renewal of the plan or for refinancing the unpaid balance. Consider asking the lender to agree ahead of time and in writing to refinance any end-of-loan balance or extend your repayment time, if necessary.

One of the best protections you have is the Federal Truth in Lending Act, which requires lenders to inform you about the terms and costs of the plan at the time you are given an application. Lenders must disclose the APR and payment terms and must inform you of charges to open or use the account, such as an appraisal, a credit report, or attorneys' fees. Lenders also must tell you about any variable-rate feature and give you a brochure describing the general features of home equity plans.

The Truth in Lending Act also protects you from changes in the terms of the account (other than a variable-rate feature) before the plan is opened. If you decide not to enter into the plan because of a change in terms, all fees you paid earlier must be returned to you.

Because your home is at risk when you open a home equity credit account, you have three days to cancel the transaction, for any reason. To cancel, you must inform the lender in writing. Following that, your credit line must be cancelled and all fees you have paid must be returned.

Once your home equity plan is opened, if you pay as agreed, the lender, in most cases, may not terminate your plan, accelerate payment of your outstanding balance, or change the terms of your account. The lender may halt credit advances on your account during any period in which interest rates exceed the maximum rate cap in your agreement, if your contract permits this practice.




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HUD Online Glossary (Source: http://www.hud.gov - July 2006)
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z


HUD Common Questions (Source: http://www.hud.gov - July 2006)

How can I buy a HUD Home?
How do members of the housing industry access the full knowledge base?
How can FHA help me buy a home?
What are the basic eligibility requirements for FHA financing?
What impact does the recent IRS ruling have on certain down payment assistance providers?

What is the American Dream Down Payment Initiative?
How can a homebuyer get down payment or closing cost assistance?
How can FHA assist me in lowering my energy costs?
Where can I obtain a list of HUD Homes for sale?
Can an individual purchase a HUD Home for a dollar?

When can I stop paying my monthly FHA mortgage insurance premium?
How do I find non-profits who operate down payment programs?
How does HUD define a first time homebuyer?
What is the Streamlined k program?
Does HUD/FHA have grant programs available for home repair?

How can I finance the purchase of a HUD Home?
Am I eligible for a mortgage insurance refund?
How do lenders document gifts given in the form of cash?
How do I become a mortgage insurance refund tracer?
How can a police officer obtain a HUD Home at a discount?


Where can I obtain FHA forms and publications?
What FHA programs are available to purchase a manufactured or mobile home?
What is the primary FHA mortgage insurance program?
How much can a lender charge on an FHA loan?
(En Espanol) Where can I obtain a list of HUD Homes for sale?

Can I use an FHA mortgage to purchase a condominium?
Is a borrower eligible for FHA financing if they have participated in consumer credit counseling?
Can gift funds come from the seller, lender or other interested party?
Can I make major improvements to my home without getting prior approval from FHA?
What is the FHA mortgage limit in my area?

Are there age requirements for borrowers using FHA financing?
If I am listed in the Credit Alert or CAIVRS system, what does that mean?
Can I rent a HUD home?
What is the Low/Moderate Income Families Program?
Are there FHA programs available for single parents?

Do the loan limits include the Upfront MIP?
Where can I obtain copies of FHA policy documents?
What can I do if my manufactured home has defects that need to be repaired?
Can I do a FHA refinance if I own the property, but am not named on the existing loan?
How do I obtain information about the payoff or servicing of a HUD Nehemiah Housing Opportunity Grant?

What is the primary FHA program for home repair?
Where can I find FHA's policy on gift funds?
Can investors assume FHA loans?
How can a teacher obtain a HUD Home at a discount?
Is there a quick and inexpensive option to refinance my FHA mortgage?

Can I receive a loan from a family member instead of a gift?
What foreclosure prevention options are available on non-FHA insured mortgages?
How can a firefighter or EMT purchase a HUD Home at a discount?
How do I find an FHA approved lender?
Can borrowers who do their own repairs under Section 203(k) receive cash reimbursement for their labor?

Can I use FHA financing to acquire a second home?
Is it acceptable to get a loan for the downpayment?
What is the Section 235 Assistance program?
What are the penalties for a HUD Home owner-occupant purchaser that does not occupy the property?
How do I use a bridal registry account for my downpayment?

Who is eligible for a HECM loan?
When should case numbers be canceled?
What rate do borrowers qualify at when using an ARM loan?
When can I stop paying my monthly private mortgage insurance?
What is the Housing Voucher homeownership program?

Can I use the Streamline K program to purchase a HUD home?
Is there a special HUD program that allows hurricane evacuees to purchase HUD homes?
What is a HUD revitalization area?
Does FHA allow unsecured loans to be used toward the downpayment?
What FHA program allows me to lower my initial monthly mortgage payments?

What FHA program allows for a reduction of interest rates?
Can I "rent to own" a HUD home?
What property improvement programs are available through FHA?
How do lenders document cash assets?
How can FHA help me if I am behind in my mortgage payments?

Can FHA clear the CAIVRS if I have evidence supporting the debt is paid off?
Must premium pricing be disclosed to the buyer?
What are the requirements for a teacher to purchase under the Teacher Next Door Program?
What is the Good Faith Estimate?
What is the primary FHA rehabilitation mortgage insurance program?

How does HUD determine the sales price of a HUD Home?
Why is a HUD Home not listed for sale?
Does FHA have special programs for Veterans?
Does FHA allow investor participation in the 203(k) or Streamline K programs?
Where can I obtain a list of government properties for sale?

Where can I find free housing counseling services?
What if I am behind in my mortgage payments and my lender won't talk to me?
Are there restrictions on when I can pre-pay or payoff my FHA mortgage?
(En Espanol) What are the basic eligibility requirements for FHA financing?
Where can I find information about a lenders' responsibility under RESPA?

What does FHA offer to military veterans?
Do I have to pay a fee to collect my mortgage insurance refund?
Can I get my HUD Home earnest money back when my loan is denied?
How do I figure how much money the lender is allowed to require in my escrow account?
Can I still obtain a FHA reverse mortgage if I lost a home through divorce?

Who gets the MIP refund if a home is sold by assumption?
How do I make my rental property available for Section 8 tenants?
Are lenders restricted from originating FHA loans for their employees?
How does HUD determine the winning bidder on HUD Home sales?
(En Espanol) How can FHA help me buy a home?

Can an investor bid on a HUD Home?
How can I obtain a copy of the appraisal on a HUD Home?
How much is counted for the borrower's labor when calculating sweat equity?
Do FHA mortgage limits automatically increase after Freddie Mac's annual mortgage limit adjustment?
What FHA program allows me to pay my mortgage off early?

Will FHA allow a Streamline Refinance of a loan by an investor?
Will HUD contribute to seller-funded down payment assistance programs on the purchase of a HUD Home?
As a senior citizen how can I convert the equity in my home into income?
What is a self-help agreement?
Can lenders collect a fee for originating a streamline refinance that gets transferred to another lender prior to closing?

How do I place a bid on a HUD Home?
What is the FHA Urban Renewal Program?
How do I lodge a complaint about the condition of a new home?
Can a lender process a 203(k) rehabilitation mortgage for an investor?
What are the counseling requirements on an FHA reverse mortgage?

For an existing property, what are the minimum distances allowed by FHA between a well and a septic tank?
Must FHA be notified when an FHA reverse mortgage borrower dies?
How do I lodge a complaint about the condition of an existing home?
How can I file a complaint about a settlement or closing issue?
How can I obtain a rental assistance voucher that can be used anywhere?

Where can I obtain information on prepayment penalties for FHA mortgages?
How does a real estate agent register to sell HUD Homes?
How do I document the value of personal property sold for funds to close?
Can a Section 203(k) loan be refinanced to a different loan type?
How do I obtain more information about Regulation Z?

What is the status of a particular HUD Home?
How do I obtain from HUD copies of documents related to my FHA insured loan?
How do I obtain a payoff or subordination of a second lien held by HUD?
How can I have the utilities turned on in a HUD Home prior to closing?
What is mortgage insurance for disaster victims (Section 203h)?

How can I find a list of non-profit agencies that are approved to do business with FHA?
Where can I find information about HUD's multifamily (5 or more housing units) housing programs?
(En Espanol) How can I buy a HUD home?
Are there exceptions to the loss of an earnest money deposit on a HUD Home?
When can interest rate adjustments be made on FHA adjustable rate mortgages?

Where can I find policy governing rent credit?
When is a HUD Homes sales contract ratified?
Who do I contact for support on Title I servicing issues?
How do I know if I won the bid on a HUD Home?
Is a hurricane evacuee who is presently renting a HUD home eligible to buy the home?

How do I file a complaint against a lender who is not FHA approved?
How can I get information about Rural Development programs?
How can I apply for a public housing unit?
How are bids on HUD Homes processed?
How do I report fraud related to a HUD/FHA transaction?

Can an investor participate in FHA's 203(k) Rehabilitation Program?
Where can I find general information about assistance for victims of hurricanes?
How can I find a real estate agent approved to sell HUD Homes?
How does the lender disburse the remaining 203(k) escrow?
Where can I find a list of HUD-approved non-profits?

Are there programs for experimental housing?
What programs are available for outlying areas?
How can a non-profit organization purchase a HUD Home at a discount?
What is the FHA Urban Renewal Rehabilitation Program?
What programs are available for Native Americans on tribal land?

Can the lender collect from the borrower amounts the lender advanced to HUD for a required principal reduction?
Where can I find information about renting or building apartments and other multifamily housing?
How do I request copies of documents from HUD?
What are my rights when obtaining an adjustable rate mortgage?
Are there special programs for home purchases near military bases?

What are Fair Market Rents?
How can my non-profit organization work with FHA programs?
Can a Section 235 loan be refinanced?
Can lenders process loans for HUD employees?
What disaster relief is available for public housing tenants?

How can I find a property that provides below market rents?
What is the mortgage insurance for service members program?
How do I pay rent on a HUD Home?
How does a real estate agent obtain a Name Address Identifier Number (NAID)?
Can a tenant occupy an FHA property through the conveyance process to HUD?

How do I submit my annual certification for my Next Door property?
What disaster relief is available for homes with FHA insurance?
What FHA program allows for purchases on Indian Reservations?
What if I have a problem with the servicing of my escrow account?
How can I get information on HUD's homeless programs?

How do I cancel a HUD Homes sales contract?
How do I request a payoff or subordination of my Next Door lien?
What contracting opportunities are available for HUD Homes?
How do I document assets that were acquired from the sale of a home?
What programs are available in older, declining areas?

How can I extend a HUD Homes sales contract?
Can I subordinate HUD's lien on a Next Door property?
Are funds saved through savings clubs eligible?
How do I deal with a servicing issue in which the loan is not FHA insured?
What disaster relief is available for homes not FHA insured?

How can I obtain mortgage account information from my lender?
What can I do if my servicing lender is handling my escrow account properly?
What rights do I have as a renter or tenant?
Who do I contact if a HUD Home was not properly winterized?
HUD or FHA is garnishing my tax return, how can I get more information?

How do I lodge a complaint about the company selling HUD Homes?
How can I get more information on consumer protection?
What is the status of my occupied conveyance request?
How can I file a housing discrimination complaint?
How do I obtain FHA or HUD information in Spanish?

How do I file a complaint against a national bank?
How do I file a complaint against a local housing program or provider?
(En Espanol) Am I eligible for a mortgage insurance refund?
How do I collect on a bill or lien attached to a HUD Home?
Where can I get assistance if my identify has been stolen?

How can I lodge a complaint involving a Veterans Administration loan?
Who do I contact to pay off my property improvement loan?
How do I file a complaint against a Federal Savings and Loan?
How do I file a complaint against a credit union?
How do I file a complaint against my public housing agency or landlord who receives rent subsidy from HUD?

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