What you should know ab

Home Equity of CreditThe Federal Reserve 

Board of Governors of the Federal Reserve Systemwww.federalreserve.gov0412
Table of contents

Home Equity Plan Checklist .......................................

What is a home equity line of credit? ...................

  What should you look for when shopping for a plan? 

  Costs of establishing and maintaining a home equity 

  How will you repay your home equity plan? .............

  Lines of credit vs. traditional second mortgage loans 

  What if the lender freezes or reduces your line of cred

Glossary ................................................................................

Where to go for help .......................................................

More resources .................................................................

If you are in t

market for cre

home equity p

is one of severa

options that migh

right for you. Before making a decision, h

ever, you should weigh carefully the cost

home equity line against the benefi ts. Sho

the credit terms that best meet your borro

needs without posing undue fi nancial ris

And remember, failure to repay the amou

you’ve borrowed, plus interest, could me

loss of your home.
Home Equity Plan Checklis

Ask your lender to help fi ll out this checklist.

Basic Features Plan A 

Fixed annual percentage rate % 

Variable annual percentage rate % 

  Index used and current value % 

  Amount of margin 

  Frequency of rate adjustments 

  Amount/length of discount (if any) 

  Interest-rate cap and fl oor 

Length of plan

 Draw period 

 Repayment period 

Initial fees

 Appraisal fee 

 Application fee 

 Up-front charges, including points 

 Closing costs

Repayment Terms 

During the draw period

 Interest and principal payments 

 Interest-only payments 

 Fully amortizing payments 

When the draw period ends

 Balloon payment? 

 Renewal available? 

 Refi nancing of balance by lender? 
What is a home equity line 

credit?

 A home equity line of credit is a form of revolving 

which your home serves as collateral. Because a h

consumer’s most valuable asset, many homeowne

equity credit lines only for major items, such as e

improvements, or medical bills, and choose not to 

day-to-day expenses.

 With a home equity line, you will be approved fo

amount of credit. Many lenders set the credit lim

equity line by taking a percentage (say, 75%) of th

appraised value and subtracting from that the ba

the existing mortgage. For example: 

Appraised value of home 

 Percentage 

 Percentage of appraised value = 

 Less balance owed on mortgage – 

Potential line of credit 

 In determining your actual credit limit, the lende

consider your ability to repay the loan (principal 

looking at your income, debts, and other fi nancia

well as your credit history.

 Many home equity plans set a fi xed period durin

can borrow money, such as 10 years. At the end o

period,” you may be allowed to renew the credit 
additional money once the period has ended. Som

call for payment in full of any outstanding balanc

the period. Others may allow repayment over a fi 

“repayment period”), for example, 10 years.

 Once approved for a home equity line of credit, y

likely be able to borrow up to your credit limit wh

want. Typically, you will use special checks to dra

line. Under some plans, borrowers can use a cred

means to draw on the line.

 There may be other limitations on how you use th

plans may require you to borrow a minimum am

you draw on the line (for example, $300) or keep 

amount outstanding. Some plans may also requir

an initial advance when the line is set up. 

What should you look for when sh

for a plan?

 If you decide to apply for a home equity line of cr

the plan that best meets your particular needs. Re

agreement carefully, and examine the terms and c

various plans, including the annual percentage ra

the costs of establishing the plan. Remember, thou

APR for a home equity line is based on the interes

will not refl ect closing costs and other fees and ch

need to compare these costs, as well as the APRs, 

Variable interest rates

 Home equity lines of credit typically involve vari

fi xed interest rates. The variable rate must be base

available index (such as the prime rate published 
interest rate you pay for the line of credit will cha

changes in the value of the index. Most lenders ci

rate you will pay as the value of the index at a pa

plus a “margin,” such as 2 percentage points. Bec

borrowing is tied directly to the value of the inde

tant to fi nd out which index is used, how oft en th

index changes, and how high it has risen in the p

important to note the amount of the margin.

 Lenders sometimes off er a temporarily discounte

for home equity lines—an “introductory” rate tha

low for a short period, such as 6 months.

 Variable-rate plans secured by a dwelling must, b

ceiling (or cap) on how much your interest rate m

over the life of the plan. Some variable-rate plans 

much your payment may increase and how low y

rate may fall if the index drops.

 Some lenders allow you to convert from a variabl

to a fi xed rate during the life of the plan, or let yo

a portion of your line to a fi xed-term installment 

Costs of establishing and mainta

home equity line

 Many of the costs of sett ing up a home equity line 

similar to those you pay when you get a mortgag

 A fee for a property appraisal to estimate the 

home;

 An application fee, which may not be refund

turned down for credit;
equals 1 percent of the credit limit); and

 Closing costs, including fees for att orneys, tit

gage preparation and fi ling, property and titl

and taxes.

 In addition, you may be subject to certain fees du

period, such as annual membership or maintenan

transaction fee every time you draw on the credit 

 You could fi nd yourself paying hundreds of dolla

lish the plan. And if you were to draw only a sma

against your credit line, those initial charges wou

increase the cost of the funds borrowed. On the o

because the lender’s risk is lower than for other fo

as your home serves as collateral, annual percenta

home equity lines are generally lower than rates f

of credit. The interest you save could off set the co

lishing and maintaining the line. Moreover, some 

some or all of the closing costs.

How will you repay your home equ

 Before entering into a plan, consider how you wil

money you borrow. Some plans set a minimum m

ment that includes a portion of the principal (the 

borrow) plus accrued interest. But, unlike with ty

ment loan agreements, the portion of your payme

toward principal may not be enough to repay the 

the end of the term. Other plans may allow paym

only during the life of the plan, which means that 

ing toward the principal. If you borrow $10,000, y

that amount when the payment plan ends. 
equity line, you may choose to pay more, and ma

off er a choice of payment options. Many consume

pay down the principal regularly as they do with 

For example, if you use your line to buy a boat, y

pay it off as you would a typical boat loan.

 Whatever your payment arrangements during th

plan—whether you pay some, a litt le, or none of t

amount of the loan—when the plan ends, you ma

the entire balance owed, all at once. You must be 

make this “balloon payment” by refi nancing it w

by obtaining a loan from another lender, or by so

means. If you are unable to make the balloon pay

could lose your home.

 If your plan has a variable interest rate, your mon

may change. Assume, for example, that you borro

under a plan that calls for interest-only payments

interest rate, your monthly payments would be $

rises over time to 15%, your monthly payments w

$125. Similarly, if you are making payments that c

plus some portion of the principal, your monthly 

increase, unless your agreement calls for keeping 

same throughout the plan period.

 If you sell your home, you will probably be requi

your home equity line in full immediately. If you 

sell your home in the near future, consider wheth

sense to pay the up-front costs of sett ing up a line 

keep in mind that renting your home may be pro

the terms of your agreement.
mortgage loans 

 If you are thinking about a home equity line of cr

also want to consider a traditional second mortga

type of loan provides you with a fi xe

money, repayable over a fi xed period

the payment schedule calls for equal 

pay off the entire loan within the loan 

might consider a second mortga

a home equity line if, for examp

set amount for a specifi c purpo

addition to your home.

In deciding which type of loan 

your needs, consider the costs u

alternatives. Look at both the A

charges. Do not, however, simp
ured diff erently: 

 The APR for a traditional second mortgage lo

account the interest rate charged plus points 

fi nance charges. 

 The APR for a home equity line of credit is ba

periodic interest rate alone. It does not includ

other charges. 

Disclosures from lenders

 The federal Truth in Lending Act requires lender

important terms and costs of their home equity p

the APR, miscellaneous charges, the payment ter

mation about any variable-rate feature. And in ge

the lender nor anyone else may charge a fee until 

received this information. You usually get these d

when you receive an application form, and you w

tional disclosures before the plan is opened. If an

than a variable-rate feature) changes before the p

the lender must return all fees if you decide not t

plan because of the change.

 When you open a home equity line, the transactio

home at risk. If the home involved is your princip

the Truth in Lending Act gives you 3 days from th

account was opened to cancel the credit line. This 

you to change your mind for any reason. You sim

lender in writing within the 3-day period. The len

cancel its security interest in your home and retu

including any application and appraisal fees—pa

account.
line of credit?

 Plans generally permit lenders to freeze or reduce 

if the value of the home “declines signifi cantly” o

lender “reasonably believes” that you will be una

your payments due to a “material change” in you

circumstances. If this happens, you may want to:

 Talk with your lender. Find out what caused 

freeze or reduce your credit line and what, if 

can do to restore it. You may be able to provi

information to restore your line of credit, suc

tation showing that your house has retained 

that there has not been a “material change” in 

circumstances. You may want to get copies o

reports (go to the Federal Trade Commission

www.ft c.gov/freereports, for information abo

to make sure all the information in them is co

lender suggests gett ing a new appraisal, be su

appraisal fi rms in advance so that you know 

the new appraisal as valid.

 Shop around for another line of credit. If yo

not want to restore your line of credit, shop a

what other lenders have to off er. You may be 

your original line of credit and take out anoth

mind, however, that you may need to pay so

application fees you paid for your original lin
Glossary

Annual membership or maintenanc

 An annual charge for access to a fi nancial produc

of credit, credit card, or account. The fee is charge

whether or not the product is used. 

Annual percentage rate (APR)

 The cost of credit, expressed as a yearly rate. For 

credit, such as car loans or mortgages, the APR in

interest rate, points, broker fees, and other credit 

borrower is required to pay. An APR, or an equiv

used in leasing agreements. 

Application fee

Fees charged when you apply for a loan or other 

fees may include charges for property appraisal a

report. 

Balloon payment

 A large extra payment that may be charged at the 

gage loan or lease. 

Cap (interest rate)

 A limit on the amount that your interest rate can 

types of interest-rate caps exist. Periodic adjustmen

interest-rate increase from one adjustment period 

Lifetime caps limit the interest-rate increase over th

loan. By law, all adjustable-rate mortgages have a

Closing or settlement costs

 Fees paid when you close (or sett le) on a loan. Th

include application fees; title examination, abstra
G

mortgages, and sett lement documents; att orneys

ing fees; estimated costs of taxes and insurance; a

appraisal, and credit report fees. Under the Real E

ment Procedures Act, the borrower receives a goo

of closing costs within three days of application. T

estimate lists each expected cost as an amount or 

Credit limit

 The maximum amount that may be borrowed on 

under a home equity line of credit plan. 

Equity

 The diff erence between the fair market value of th

the outstanding balance on your mortgage plus a

home equity loans. 

Index

 The economic indicator used to calculate interest-

ments for adjustable-rate mortgages or other adju

loans. The index rate can increase or decrease at a

also Selected Index Rates for ARMs over an 11-ye

(www.federalreserve.gov/pubs/arms/arms_englis

examples of common indexes that have changed 

Interest rate

 The percentage rate used to determine the cost of 

money, stated usually as a percentage of the princ

amount and as an annual rate.

Margin

 The number of percentage points the lender adds 

rate to calculate the ARM interest rate at each adj
 The lowest amount that you must pay (usually m

your account in good standing. Under some plan

payment may cover interest only; under others, it 

both principal and interest. 

Points (also called discount points)

 One point is equal to 1 percent of the principal am

mortgage loan. For example, if a mortgage is $200

point equals $2,000. Lenders frequently charge po

fi xed-rate and adjustable-rate mortgages to cover 

tion costs or to provide additional compensation 

or broker. These points usually are paid at closing 

paid by the borrower or the home seller, or may b

them. In some cases, the money needed to pay po

borrowed (incorporated in the loan amount), but 

increase the loan amount and the total costs. Disc

(also called discount fees) are points that you volu

to pay in return for a lower interest rate. 

Security interest

 If stated in your credit agreement, a creditor’s, les

ee’s legal right to your property (such as your hom

bonds) that secures payment of your obligation u

agreement. 

Transaction fee

 Fee charged each time a withdrawal or other spec

tion is made on a line of credit, such as a balance 

cash advance fee. 

Variable rate

 An interest rate that changes periodically in relati

such as the prime rate. Payments may increase or 

accordingly.
Help

Where to go for help

 For additional information or to fi le a complaint a

savings and loan, credit union, or other fi nancial 

tact one of the following federal agencies, depend

of institution.

Regulatory Agency Regulated Entity(ies) Teleph

Federal Reserve Consumer 

Help

P.O. Box 1200

Minneapolis, MN 55480

Federally insured statechartered bank members of 

the Federal Reserve System

(888) 8

www.f

sumerh

Consumer Financial Protection Bureau (CFPB)

P.O. Box 4503

Iowa City, IA 52244

Insured depository institutions and credit unions 

(and their affi liates) with 

assets greater than $10 

billion, and nondepository 

institutions such as mortgage originators, mortgage 

brokers and servicers, 

larger participants of other 

fi nancial services products, 

private education loan 

providers, and payday 

lenders

(855) 4

www.c

Offi ce of the Comptroller 

of the Currency (OCC)

Customer Assistance Unit

1301 McKinney Street

Suite 3450

Houston, TX 77010

National banks and 

federally chartered savings 

banks/associations

(800) 6

www.o

www.h

Federal Deposit Insurance 

Corporation (FDIC)

Consumer Response 

Center

1100 Walnut Street, Box #11

Kansas City, MO 64106

Federally insured statechartered banks that are 

not members of the Federal 

Reserve System

(877) A

(877) 2

www.f

www.f
Federal Housing Finance 

Agency (FHFA)

Consumer Communications

Constitution Center

400 7th Street, S.W.

Washington, DC 20024

Fannie Mae, Freddie Mac, 

and the Federal Home 

Loan Banks

(202) 6

www.fh 

www.fh 

aspx?P

National Credit Union 

Administration (NCUA)

Consumer Assistance

1775 Duke Street

Alexandria, VA 22314-3428

Federally chartered credit 

unions

(800) 7

www.n

www.m

Federal Trade Commission 

(FTC)

Consumer Response 

Center

600 Pennsylvania Avenue, 

N.W.

Washington, DC 20580

Finance companies, retail 

stores, auto dealers, mortgage companies and other 

lenders, and credit bureaus

(877) F

(877) 3

www.ft 

www.ft 

Securities and Exchange 

Commission (SEC)

Complaint Center 

100 F Street, N.E.

Washington, DC 20549-

0213

Brokerage fi rms, mutual 

fund companies, and 

investment advisers

(202) 5

www.s

www.s

questio

Farm Credit Administration

Offi ce of Congressional 

and Public Aff airs

1501 Farm Credit Drive

McLean, VA 22102-5090

Agricultural lenders (703) 8

www.f

Small Business Administration (SBA)

Consumer Aff airs

409 3rd Street, S.W.

Washington, DC 20416

Small business lenders (800) U

(800) 8

www.s
Help

Commodity Futures Trading Commission (CFTC)

1155 21st Street, N.W.

Washington, DC 20581

Commodity brokers, commodity trading advisers, 

commodity pools, and 

introducing brokers

(866) 3

www.c

Protec

U.S. Department of Justice 

(DOJ)

Criminal Division

950 Pennsylvania Avenue, 

N.W.

Washington, DC 20530

Fair lending and fair housing issues(202) 5

www.j

Department of Housing 

and Urban Development 

(HUD) Offi ce of Fair Housing/

Equal Opportunity

451 7th Street, S.W.

Washington, DC 20410

Fair lending and fair housing issues(800) 6

www.h
More resources

 For more resources on mortgages and other fi nan

www.federalreserve.gov/consumerinfo.