Do you need money for a home improvement project or big expense in your life? A home equity line of credit may be a great option, but you need to find the right HELOC lender. Don’t assume you must use your current lender. You can use any lender that approves you for the loan. We’ll discuss the factors you should consider before choosing a lender for your loan.
Know the Terms
You must as a HELOC lender the terms of the loan before agreeing to take it. Each lender has different requirements. A few of the most common factors you’ll want to know about include:
- Interest rate – The rate won’t be fixed. You should ask about the introductory rate and how long it lasts. You should then also ask how the rate changes and what you should expect? Ask what the worst case scenario is so you can see if it’s something you can afford.
- Margin – The margin affects your future interest rates. It’s what the lender adds to the current prime rate to calculate your interest rates. You should compare margins between lenders. You can control the margin. You can’t control the prime rate.
- Annual fee – Many HELOCs include an annual fee. Make sure you find out the cost as it comes right out of your line of credit funds.
- Cancellation fee – Is there a cancellation fee? In other words, it’s like a prepayment penalty. If you move or pay off the loan early, see if the lender will charge you.
You’ll also want to know the minimum requirements a lender has. HELOC loans are usually for much lower amounts than regular mortgages. Because of this, lenders often set strict requirements in order to ensure that they make a profit on the loan. Ask the lender the following questions:
- Is there a minimum draw requirement – Some lenders require that you take out a specific amount at the closing. This ensures that they make interest on the funds. You don’t owe any payments unless you draw funds. At that point, you must make interest payments. Again, this is how the lender makes a profit.
- Is there an average balance requirement – This goes along with the minimum draw requirement. Some lenders require that you have an average balance outstanding during the draw period. Again, this is so they can make interest on your loan.
- How long can I draw funds – Lastly, you should ask how long the draw period exists. If there are minimum requirements, you’ll want to know how long they last. Once the draw period ends, you then start the repayment period. At that point, all minimum requirements will end.
Understand the Repayment Period
You’ll also want to understand the repayment period. Just like the draw period, each HELOC lender usually has specific requirements.
- Is there a fixed rate during repayment – Usually, lenders fix the interest rate once you hit the repayment period. Inquire about the rate and how it’s calculated so you know what to expect.
- Is there a balloon payment – Most loans don’t include a balloon payment any longer, but you should ask. Find out if the payments you are required to pay are fixed or if they’ll be one lump sum due at a specific time.
- Is there a prepayment penalty – If you decide to pay off your balance early in the repayment period, make sure there is not a prepayment penalty.
Closing Costs From the HELOC Lender
In addition to the above questions, you’ll want to know what closing costs the HELOC lender charges. – Every loan has closing costs. Luckily, the HELOC loan has fewer than other loans, but you’ll still want to know what they are. Compare the fees between different lenders to see which one offers the best deal.
Read the Fine Print
As with any loan, make sure you read the fine print and ask any questions you have. Don’t assume the lender has your best interests in mind – they don’t know what you can and cannot handle. For example, if there’s a prepayment penalty, they don’t know your future plans. What if you plan to move in the next 3 years? You’ll get hit with that penalty, paying more than you bargained for the HELOC.
What if you don’t plan on drawing funds at the closing and there’s a minimum requirement? If you don’t know this, you could end up paying fees that you didn’t realize. This could make the HELOC loan more expensive than you bargained for in the beginning.
Just like any loan, make sure you comparison shop and take your time. Find the best deal for you, but don’t overlook the little details. One overlooked factor could make your loan much more expensive than you ever anticipated. Understanding the terms of your loan will help you find the HELOC lender that is right for you.