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Tips for Tapping Home Equity
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WASHINGTON, July 12, 2004 -- More and more, consumers are tapping the equity in their homes to pay for home improvements or college tuition, or to consolidate debts. Home equity lines of credit and loans can have favorable interest rates and the interest may be tax-deductible, depending on your situation. But you need to shop around to get the best deal. |
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4-steps to the
Best Home Equity Options |
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Jeanne Hogarth, program manager for consumer education and research at the Federal Reserve Board, notes that a home equity line of credit is different from a home equity loan. "A line of credit is a form of revolving credit -- like a credit card -- with your home as collateral. A home equity loan, on the other hand, is for a fixed amount of money, paid back over a fixed term, much like your primary mortgage."
When you shop for a home equity line of credit or loan, knowing what questions to ask can make a big difference in
what you'll pay. Is the lender offering you a home equity loan or line of credit? Explore all your options.
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What are the interest rate and fees? Some plans have lower interest rates but higher fees -- appraisal fees, application fees, attorneys' fees, document preparation fees, etc.
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What is the APR? The APR (annual percentage rate) for a line of credit is based on the interest rate alone -- it does not include points or other charges. The APR for a home equity loan takes into account the interest rate plus points and other finance charges. So compare all costs carefully.
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Is the interest rate variable or fixed? If it's a variable rate, ask about the index (the rate that serves as a base for the interest rate charged), the margin (number of percentage points added to the index rate to set the annual percentage rate), and if there are any caps (limits on how much a variable interest rate may increase during the life of the plan). Remember that your monthly payments may increase with a variable rate.
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How will you repay the loan? Some plans set minimum payments that cover interest payments only, while others have payments that cover both principal and interest. If you have an interest-only payment plan, ask how you will repay the principal.
Hogarth encourages consumers to "read the credit agreement carefully and study the terms and conditions -- including the APR, the fees and other costs of establishing the plan, and the repayment terms." Some lines of credit let you convert a line of credit to a traditional home equity loan with fixed payments for a set number of months.
The Federal Reserve Board's What You Should Know about Home Equity Lines of Credit has information on how to get and manage a home equity line of credit, and includes a consumer checklist to help you shop and compare. You can find it on the Federal Reserve Board's web site or you can order a free copy from Publications, Board of Governors of the Federal Reserve System, Washington, DC 20551.
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