There are significant risks associated with home equity lines of credit, which are commonly referred to as HELOCs. Many people have been unpleasantly surprised by their experiences, and still others are encountering problems using their HELOCs now that the economy is in trouble. If you’re thinking about getting a HELOC you need to know as much about them as possible.
One major risk associated with a HELOC comes from the fact that they rise with the prime rate. So if the prime rate rises, you’ll see a rise in your monthly payment. HELOCs also have no limit on the amount they can increase, with most having a limit of 18%. A standard mortgage or home equity loan, by contrast, can have fixed interest rates.
What makes HELOCs most tricky, is the lender’s margin. This is something that they charge on top of the prime rate – and they won’t tell you about the margin unless you ask. Margins are determined by your credit history, how much debt you have on your house when you apply for the HELOC and other factors, and will vary from lender to lender. Many people have been surprised to see their monthly payments shoot up after the first few months of the initial introductory offer have expired.
Lenders are also required to offer a Truth In Lending summary, known as a TIL. In many cases, however, the TIL does not require the lender to disclose the margin and that can lead to unpleasant consequences.
If you’re looking for a HELOC, be sure to sit down with a financial advisor or a trusted bank representative and discuss all aspects of the transaction in as much detail as possible. When it comes to your money and your home you can never have too much information.