A home equity line of credit is a wonderful method for a homeowner to obtain extra money. Those who obtain a home equity line of credit are in fact borrowing against the current equity in their home. The home equity line of credit enables individuals to borrow specified amounts of money from a pre-approved credit line issued by a lending institution. For those who are considering this type of borrowing method, it is important to highlight various costs which may be associated with the home equity line of credit.
Application Costs
Application costs for applying for a home equity line of credit are fees that are charged by various financial institutions. Whether or not a lender charges application fees depends on the lender itself and will vary from lender to lender. The reason in which lenders charge application fees is to pay for costs associated with the processing of one's application for a home equity line of credit. This is true whether the individual is approved for a loan or not. Application costs will vary depending on the lender but most of these fees are reasonable.
Loan Costs
There will also be other various costs associated with the home equity line of credit. One such cost will be the interest which is charged to the amount that is borrowed from the approved line of credit. This will vary from loan to loan and frequently will be based on the general market interest rates. It is important to note that in the case of home equity lines of credit, interest will only be charged on the amount which is borrowed against the total credit line not on the entire credit line itself.
Another type of loan cost concomitant with the home equity line of credit is the appraisal fee. Quite often a lender will require that a professional appraisal be performed on the home to determine its true market value. These hired appraisers charge a certain amount of money to appraise the home and this will be charged to the borrower.
Hidden Costs
There are also some costs which may be seen as hidden costs as the borrower does not expect them or is not aware of their existence. These hidden costs are ones which are charged to the borrower for the processing or maintenance of the loan. Fees such as annual maintenance fees and transaction fees are two types of hidden costs which may be attached to the home equity line of credit. Therefore, it is important to inquire with the lender regarding any and all charges that will be the responsibility of the borrower who obtains the line of credit.
Prepayment Penalties
Another form of fees and/or charges which the borrower has to inquire about is prepayment penalties. Prepayment penalties are fees which are charged to borrowers who pay off their total borrowed amount prior to the expiration of the loan term. For example, if one is to pay their last loan payment on April 1, 2008 but pays it off on May 5, 2007, that individual may have to pay a certain additional percentage of the borrowed amount. This prepayment penalty is a fee which encourages individuals to stay with their current lender until the loan term has expired since few individuals wish to pay extra charges on their loan.
With that said, it is important to inquire about any prepayment penalties which may exist on the home equity line of credit. Any prepayment penalties that are associated with a loan must be mentioned in the loan documents so it is vital for the borrower to not only ask the loan officer about these fees but to thoroughly read the loan documents to ensure that prepayment penalties are not part of the loan agreement. This will protect the individual from fees of this nature should they desire to pay off their borrowed amount prior to the expiration of the loan term.
Closing Costs
Closing costs are other fees and charges which may be seen with a home equity line of credit. Closing costs include a variety of items such as some of the fees listed above. Closing costs are charges that are paid by the borrower at the document signing and may include the appraisal fee, points on the loan, title fees, attorney's fees, document preparation fees and insurance fees. Some of these costs will be charged in advance and others may be due at the closing.
Differences in Rates
When considering the various costs and fees associated with obtaining a home equity line of credit, one should be aware of the fact that different lenders and service providers will charge different rates. This is important as it encourages individuals to shop around prior to settling on a specific lender from which to obtain a home equity line of credit. Finding a better rate on one or more of the aforementioned costs will add up in the end and provide the borrower with a less expensive home equity line of credit alternative.
Tax Issues
Another type of cost which may be associated with the home equity line of credit regards taxes. Some may wonder whether home equity lines of credit are tax-deductible financial options. The answer to this question is that it depends. Tax issues will vary depending upon a variety of factors and it is important for individuals to consult with a reputable tax advisor to answer these questions. In general, the interest on a home equity line of credit may be deductible if the home equity debt is less than $100,000. The total debt on the home must also be less than the appraised value on the home. Again, tax issues and applicability vary and one cannot be certain of the true tax advantages until consulting with a tax advisor.
Summary
Home equity lines of credit are wonderful options for those homeowners who are interested in borrowing against the available equity in their home. Although there may be certain costs associated with loans of this type, it is important to note that these costs are necessary in many regards and can be rationalized by viewing the necessity of a home equity line of credit.