If you are thinking about a home equity line of credit, you might also
want to consider a traditional second mortgage loan. A second mortgage
provides you with a fixed amount of money repayable over a fixed
period. In most cases the payment schedule calls for equal payments
that will pay off the entire loan within the loan period. You might
consider a second mortgage instead of a home equity line if, for
example, you need a set amount for a specific purpose, such as an
addition to your home.
In deciding which type of loan best suits your needs, consider the
costs under the two alternatives. Look at both the APR and other
charges. Do not, however, simply compare the APRs, because the APRs on
the two types of loans are figured differently:
The APR for a traditional second mortgage loan takes into account the
interest rate charged plus points and other finance charges.
The APR for a home equity line of credit is based on the periodic
interest rate alone. It does not include points or other charges.
Disclosures from lenders
The federal Truth in Lending Act requires lenders to disclose the
important terms and costs of their home equity plans, including the
APR, miscellaneous charges, the payment terms, and information about
any variable-rate feature. And in general, neither the lender nor
anyone else may charge a fee until after you have received this
information. You usually get these disclosures when you receive an
application form, and you will get additional disclosures before the
plan is opened. If any term (other than a variable-rate feature)
changes before the plan is opened, the lender must return all fees if
you decide not to enter into the plan because of the change.
When you open a home equity line, the transaction puts your home at
risk. If the home involved is your principal dwelling, the Truth in
Lending Act gives you 3 days from the day the account was opened to
cancel the credit line. This right allows you to change your mind for
any reason. You simply inform the lender in writing within the 3-day
period. The lender must then cancel its security interest in your home
and return all fees including any application and appraisal fees paid
to open the account.
