Cost Of Setting Up A Home Equity Line Of Credit

Cost of setting up a home equity line of credit

Setting up a home equity line of credit is like that of buying a new house (and signing a new mortgage application). Some of the costs include:
Property appraisal fee (to appraise the current value of your home)
Credit application fee (which is NOT refundable if you get turned down for credit)
Attorney fees for drafting & filing the line of credit agreement, title search fees, insurance and any taxes payable.
Transaction fee charged on everytime you make a withdrawal from your line of credit
Some home equity lines of credit are also subject to annual maintenance & administration fees. Check your agreement and with your lender to find out more about this.
Repayment of Home Equity Loans

How you repay back your home equity line of credit depends on the type of lender you borrow from. Some lenders do not accept monthly payments (towards the principal amount), and will want 100% of their money back upon maturity of the loan. For example, if you take out a $100,000 home equity line of credit on January 1st, 2005 and it matures on Dec 31st, 2010, this means you will have to repay back the entire $100,000 on Dec 31st, 2010. Ofcoure, you will have to make interest payments on these loans, based on the Annual Percentage Rate (APR) and the Prime Rate.

Many smart consumers like to pay off their home equity lines of credit as fast as possible. For example, if you took out $50,000 to purchase an expensive car, you might want to set aside $1000 every month so as to be able to fully repay back your loan upon maturity. You don't want the maturity date to expire and you NOT having the $50,000 cash available to fully pay off your loan, that would be a total disaster! If you choose to pay your entire $50,000 original principal balance upon maturity, this is known as a "balloon payment." If you cannot make this balloon payment on your loan, the lender will simply confiscate your home from you.

What happens if you sell your home, while still owing money on the home equity line of credit? If you do so, you will have to fully repay back the loan immediately. Therefore, do NOT take out a home equity line of credit if you are planning to sell your home in the near future.

Disclosure of Home Equity Loan Terms

Under the Federal Truth in Lending Act, all home equity line of credit lenders are required to disclose to you the important terms of the loan. Some of these terms include:
Annual Percentage Rate
Closing costs including attorney fees for drafting & filing the line of credit agreement, title search fees, insurance and any taxes payable.
Terms of payment (whether it will be a one time balloon payment or variable monthly payments)
Idea about the Interest Rate charged, which Index it is based on and the Margin.

Cancelling a Home Equity Line of Credit Loan

If you put your principal residence as collateral against a home equity line of credit loan, the Federal Truth in Lending Act gives you 3 days from the date your account is opened to revoke your decision and cancel the home equity line of credit loan. You must inform the credit lender by writing an official letter. Within these 3 days, you will also be refunded any closing costs for which you might have paid, including appraisal costs and any application (attorney) fees.