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Critical Terms In Your Home Equity Line Of Credit Loan
By EchoBay Loans Staff Writer

When venturing into the world of shopping for a home equity line of credit, you're going to want to know the basics of how these lines of credit work and you're also going to want to be sure that you understand the lingo. The first thing to understand is that a home equity line of credit is different than a standard home equity loan. When you take out a home equity loan, you borrow a fixed amount of money and pay the loan back in set, monthly installments. This is very similar to how a first mortgage works.

A home equity line of credit, on the other hand, works more like a low-interest credit card. When you open a home equity line of credit, a credit line is established and you can borrow money from that line of credit as you need it.
You will have a minimum monthly payment that you are obligated to pay towards the balance on the credit line, but you can always opt to pay more than the minimum monthly payment to pay off the balance sooner. When you pay towards the balance of your loan, the amount you owe decreases and the amount of credit available to you increases.

The home equity line of credit is quickly becoming a very popular way to finance a variety of large purchases, such as car purchases, vacations, home improvements and more. Things that people used to pay for with credit cards are now being purchased using the equity in one's home. This is largely due to the fact that a home equity line of credit will offer a lower interest rate than your typical credit card. Even if your credit card charges you a low interest rate of 9.9 percent (which is low for credit cards), you can use your home equity line of credit to make a purchase and may pay just a 5 or 6 percent interest rate. That can add up to quite a bit of money over time.

While a home equity line of credit is a great way to gain access to a large line of credit at low interest rates, it's important that you are familiar with how those interest rates work. If your credit line is starting out with an extremely low interest rate, you're more than likely being quoted an introductory rate. This introductory rate can be compared to a new-customer special or a limited-time offer. What that means is that your interest rate is going to increase at some point in the future, sometimes as soon as a few months after you home equity line of credit becomes available to you.

Even if you're not being offered an introductory rate, there is still a good chance that the interest rate on your home equity line of credit is going to go up. This is because many of these lines of credit come attached to a variable interest rate. That means that the interest rate on the line of credit can adjust over the course of the draw period. If your home equity line of credit is attached to a variable rate, be sure that you know what the periodic and lifetime caps of the interest rate are.

The periodic cap is the limit that the interest rate can go up at any given time, and the lifetime cap is the total maximum that the interest rate can go up over the life of the line of credit. It should also be noted that if your home equity line reaches its lifetime cap, the lender may freeze your ability to borrow more funds against the home equity line of credit.

Whether or not your interest rate will go up will be determined by the prime rate or some other index, depending on what determining method your financial institution uses. Most banks adjust their rates yearly and base these rates on the Wall Street Journal prime rate plus a margin. When shopping for a home equity line of credit, you'll want to inquire as to what index is used to determine rates, how much the margin is, and how often these rates can change. At this time, you can also inquire about the periodic and lifetime caps that apply to the interest rates.

If you prefer stability and the thought of your home equity line of credit interest rate fluctuating causes butterflies to erupt in your stomach, you may want to go with a lender that will give you the ability to convert from a variable-rate to a fixed-rate home equity line of credit. Sometimes lenders may even allow you to convert a part of your balance into a fixed-rate installment loan. If these are options that you'll want to have access to, you're going to want to check out your lenders policies and products prior to establishing a home equity line of credit. Once you determine what your lender offers, you can decide how well their products and services meet your needs.


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