It's not just the rate

04.05.20 10:29 PM Comment(s)

From the Clipboard-Debt-It's not just the rate

I was speaking with a few people last week regarding an idea they had. During this time, to provide a little bit more peace of mind if you're still working is to get a line of credit that you can tap so that in the case of emergency. For homeowners, that means getting a home equity line of credit (HELOC).

Now, often people use interest rate as the basis to compare which line of credit or which bank to go to, but there are far more factors than just the rate.

First, different banks will have different credit criteria and among them is something called a loan to value ratio. What this simply means is that the combination of the first mortgage on your house and a home equity line of credit, combined, divided by the total value of the house. Most banks would have a limit on how high they willing to go. Typically, you would see things 75% or 80%, though some banks would go as high as 90% or even 100%. This would act as a limit on how much you can borrow overall.

The second factor is the draw period and the repayment period. The draw period simply means the amount of time you have to be able to borrow and pay back, similar to a credit card. Typical terms be a 10 year or 15 year draw period though I've seen some as short as 5, as long as 35. On the other hand, the repayment period can vary as well. The repayment period simply means that whatever balance you have at the end of that draw period, that balance gets converted into a regular mortgage loan with a fixed monthly payment. And again, here there are differences between banks. Some give 10 years while others give 20.

Third, some lines of credit carry fees. Lines of credit can have an annual fee much like a credit card. Additionally, banks can also charge a fee for closing your line of credit early. For example, there may be a closing fee if you close your line of credit within the first two to four years.

The last factor is the minimum draw amount. That simply means how much money you have to take each time you access the HELOC. There may be an initial draw requiring you to take money as soon as you get the line of credit whether you actually need it or not. Other HELOCs require a minimum draw of some amount when the line is in place. For example, some HELOCs require a $500 minimum draw. Thus, even if I only needed $100, I'd be forced to take $500. So as you can see, they're far more factors and just the interest rate.

If you're going to establish a HELOC, because you're doing a home improvement, or consolidating debt, or just simply providing that backup in case of emergencies during this time of crisis, there's far more factors to consider than just the interest rate. 

My content is for educational purposes only and should not be construed as advice or any kind of solicitation to buy or sell anything. As always, consult your own financial or tax professional for your own specific situation. Your mileage may vary. Batteries not included.


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