Home Equity Terms

summary review of home equity terms and features

Terms* Home Equity Line of Credit Home Equity Loan
Repayment Terms

You can choose how much to pay each month when your statement comes due.

You can pay the minimum amount, the entire amount, or any amount in between.

This is one of the greatest features of the home equity line of credit.

The minimum amount required may vary by lending institution. Make sure that the minimum payment required pays the entire interest charges for the month. You want to avoid negative amortization — this is where the payment does not cover interest charges for the period and any unpaid interest is added to your borrowed amount.

Most lenders allow you to select the repayment term in months.

It may vary by your LTV position and the amount your borrow. Most terms range from 120-240 months (10-20 years).

There are a few exceptions where you can get longer terms.

Optional Minimum Repayment Amount

Some lenders will allow you to choose the minimum repayment schedule. The two most common repayment schedules include:

  • Interest only payments plus any penalty-related fees

    none of the minimum payment is used to reduce the principal
  • Repayment percentage of the balance plus interest and any penalty-related fees

    a small portion of the payment is used to reduce the principal — note however that the amount paid will not reduce your loan amount to zero when it is due
Balance Calculation Method

Generally the Average Daily Balance (including all new advances).

May vary by lending institution.

Payment Due Dates Varies xxth day of each month.
Payment Options

Check with your lending institution.

Some banks allow for multiple payment options that may include in person, by mail, by phone, by electronic device, or by ATM.

Some banks also offer rate reduction for automated draft. Check with the lending institution.

Maximum Loan Amount

Extended line or loan amounts may vary by lending institution. These amounts are determined by taking a percentage of the appraised value of your home and subtracting the balance owed on the existing mortgage.

For example:

Property Value: $200,000
Mortgage Balance: $120,000*

The maximum amounts you can borrow under this example at varying LTV levels is as follows:

Market Value:  $200,000 $200,000 $200,000
Percentage LTV:  80%  90%  100%
Percentage of Value:  $160,000 $180,000 $200,000
 Less Mortgage Debt:  $120,000 $120,000 $120,000
 Equals Total Equity:  $40,000  $60,000  $80,000

This is calculated by taking:

Property Value
(times) % LTV
(minus) Mortgage Balance

If the above home was appraised at $1million dollars, lending institutions may limit the amount they will lend at each LTV level.

Calculate your own LTV?

* Includes first, second and all home liens

Initial Advance Upon Account Opening

Some lenders may require an initial advance upon open your account to avoid paying closing costs.

This may vary by lending institution.

All home equity loans require an amount being advanced.

Some lenders may require a minimum amount to avoid paying closing costs.

This may vary by lending institution.

Access Fees or Minimum Draw Requirements

Varies by lender.

Some lenders do not impose any restrictions.

Other lenders may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding.

Account Access Period

Varies by lender.

Many lenders allow access to your account for up to 5-10 years with a renewable option.

If you choose not to renew, or if you fail to meet the renewal requirements, the line will close and the remaining balance will be due.

Some lenders will amortized your remaining balance over a fixed repayment period of 10-20 years. Again, this may vary by lender.

If the lender does not allow amortization at the end of the draw period, you will need to pay the balance due or face foreclosure on your home.

Access Features

Varies by lender.

Typically, lenders will provide you special checks that can be used to "write yourself a loan", or in other words, access your account.

In addition, some lenders provide a credit/debit card access to your account.

Caution: although you are protected against fraudulent use of the cards, your home can be potentially exposed for a short period to unauthorized use if your card is stolen.

Annual Percentage Rate The Annual Percentage Rate (APR) is calculated by taking a margin and adding it to an a rate index, usually the PRIME RATE. The rate may vary as described below. Maximum and minimum APRs vary by state. The Annual Percentage Rate (APR) is a fixed rate determined by the bank. The APR will not vary as it may with the Home Equity Lines of Credit.
Variable Rate Information

Your annual percentage rate may vary. With most banks, the rate is determined by adding a margin (or percentage, visit our rates page for information) to the "PRIME RATE" as quoted by some financial media on a certain day of the month. For example, you may see the following:

"The rate is determined by adding a margin to the 'Prime Rate' as quoted under "Money Rates" in The Wall Street Journal on the 25th day of each month for the first regular business day thereafter."

If the "PRIME RATE" goes up, your APR will rise thus increasing your minimum payment. If the "PRIME RATE" comes down, your APR will come down thus decreasing your minimum payment.

Maximum and minimum APRs may vary as set by individual state laws. All home equity lines must list a rate cap.

You will pay interest only on the amount you borrow, not on the total credit line of your account.

Other Variable Rate Information If the lending institution quotes an APR that is pegged to some index other than the "PRIME RATE ", request from your lender a view of historical changes for the index rate being used. Compare this trend against the historical trends for the "PRIME RATE" to note frequency changes in APR and how high the rate has climbed. N/A
Fixed Rate Information N/A Lender Determines Rate
Lower Interest Rate for Higher Balances Most lenders charge lower rates for higher loan balances. Visit our rate page for information.
Lower Rate for Automatic Payment Some lenders may offer a lower APR rate if all payments are deducted automatically from a bank checking account. Some lenders may offer a lower APR rate if all payments are deducted automatically from a bank checking account.
Tax-deductible Interest*

Your home equity line can save you money since it is secured by a mortgage lien on your home. The interest charged to your equity account is considered mortgage interest and may be tax deductible for some taxpayers.*

See what your effective tax rate will be for each income level

* Tax savings are available for taxpayers who qualify to deduct mortgage-related interest from their taxes. See your tax advisor for more information.

Annual Fee Shop around for banks that do not charge annual fees. This may vary on the amount you borrow. You will find some banks that charge an annual fee for accounts that are dormant. Generally none. But that may vary by lending institution. Shop around.
Late Fee Can range from $0 to $35 or higher (varies by state) Can range from $0 to $35 or higher (varies by state)
Overdraft Protection Some lenders will allow your equity line account to be used as an overdraft protection on the Bank's Deposit Account. This can save you the cost and embarrassment of accidental overdrafts. The checking account and equity line must be with the same bank N/A
Closing Costs

Costs for an appraisal, title search, credit check, document handling and other similar costs the lending institutions incurs to open your equity line account or loan.

Most banks do not charge closing costs if you borrow at a certain level. However, some restrictions may apply if you close your account prior to a minimum period set by the bank.

*The proceeding features and terms may vary by lender. Check with your lender before finalizing your home equity decision.

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