Shopping for a HELOC

Because home equity lines of credit (HELOCs) are very different from standard mortgages, the questions you need to ask when shopping for them are different, as well. It is very difficult to compare HELOCs to standard mortgages, but shopping for a HELOC from different lenders is actually easier than shopping for a standard mortgage.

Because all HELOCs are tied to the prime rate, the basic rate of a HELOC will not differ from lender to lender. This is different from a standard adjustable rate mortgage (ARM), which may be tied to a variety of varying indexes.

With HELOCs, it is much more important to focus on the margin, which is the additional rate charged by your lender. Margins are generally not disclosed unless asked, but can vary greatly from lender to lender.

You’ll also want to find out if there is an initial fixed rate with your HELOC, and how long it lasts. Rates don’t stay fixed long on HELOCs, but you should still look for the lender who will hold a low initial rate the longest.

Some HELOCS also have minimum amounts you are required to take out at the beginning of the loan, or a minimum average loan balance. These requirements vary among lenders, and could be important to you depending on the purpose for which you are using your HELOC.

The last consideration when shopping for a HELOC is the existence of upfront fees. These fees are probably the least important aspect of your HELOC shopping, since fees are generally low for all HELOCs.

However, you’ll still want to know in advance all upfront lender and third party fees. You’ll also want to know if there are any annual fees associated with your HELOC, though these fees are usually waived for the first year.

The final type of fee about which to inquire is a cancellation fee. Though common, cancellation fees are usually waived after you have possessed the HELOC for a three year period.

If you keep all these considerations in mind while shopping, you are sure to find the best possible deal on a HELOC.