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Reverse Mortgage Information
Under tax law, depending on your specific situation, you may be allowed to deduct the interest because the debt is secured by your home. If you are in the market for credit, a home equity plan may be right for you. Or perhaps another form of credit would be better. Before making a decision regarding a home equity line of credit, you should weigh carefully the costs of a home equity line against the benefits. Remember, failure to repay the amounts you’ve borrowed, plus interest, could mean the loss of your home. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. What should you look for when shopping for a home equity loan? Read the credit agreement carefully, and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs of establishing the plan. If you decide to apply for a home equity line of credit, look for the plan that best meets your particular needs. The APR for a home equity line is based on the interest rate alone and will not reflect the closing costs and other fees and charges, so you’ll need to compare these costs, as well as the APRs, among lenders. Interest rate charges and related plan features. Lenders sometimes offer a temporarily discounted interest rate for home equity lines--a rate that is unusually low and may last for only an introductory period, such as 6 months. The variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or an U.S. Treasury bill rate). The interest rate for borrowing under the home equity line changes, mirroring fluctuations in the value of the index it is tied to. Most lenders cite the interest rate you will pay as the value of the index at a particular time plus a "margin," such as 3 percentage points. Home equity lines of credit typically involve variable rather than fixed interest rates. Because the cost of borrowing is tied directly to the value of an index, it is important to find out which index is used, how often the value of the index changes, and how high it has risen in the past as well as the amount of the margin. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop. Variable-rate plans secured by a dwelling must, by law, have a ceiling (or cap) on how much your interest rate may increase over the life of the plan. Some lenders allow you to convert from a variable interest rate to a fixed rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan. Some variable-rate plans may not allow you to draw additional funds during a period in which the interest rate reaches the cap. Plans generally permit the lender to freeze or reduce your credit line under certain circumstances. Lines of credit vs. traditional second mortgage loans. If you are thinking about a home equity line of credit, you might also want to consider a traditional second mortgage loan. You might consider a second mortgage instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home. A second mortgage provides you with a fixed amount of money repayable over a fixed period. In most cases the payment schedule calls for equal payments that will pay off the entire loan within the loan period. In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at both the APR and other charges. Do not, however, simply compare the APRs, because the APRs on the two types of loans are figured differently:
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