Not
checking to see if your credit line has a
pre-payment penalty clause.
If
you are getting a "NO FEE" credit line,
chances are it has a pre-payment penalty clause.
This can be very important (and expensive)
if you are planning to sell or refinance your home
in the next three to five years.
Getting
too large a credit line.
When
you get too large a credit line, you can be turned
down for other loans. Some lenders calculate
your credit line payments based upon the available
credit, even when your credit line has a zero
balance. Having a large credit line indicates a
large potential payment, which makes it difficult
to qualify for loans.
Not
understanding the difference between an equity
loan and a credit line.
An
equity loan is closed--i.e., you get all your
money up front, then make payments on that fixed
loan amount until the loan is paid. An
equity credit line is open--i.e., you can get an
initial advance against the line, then reuse the
line as often as you want during the period the
line is open. Most credit lines are accessed
through a checkbook or a credit card. Credit
line payments are based upon the outstanding
balance.
Use
an equity loan when you need all the money up
front--e.g. home improvements or debt
consolidation. Use a credit line if you have
an ongoing need for money or need the money for a
future event--e.g., you need to pay for your
child's college tuition in three years.
Not
checking the lifecap on your equity line.
Many
credit lines have lifecaps of 18%. Be
prepared to make high interest payments if rates
move upwards.
Getting
a credit line from your local bank without
shopping around.
Many
consumers get their credit line from the bank with
which they have their checking account. Shop
around before deciding to use your bank.
Not
getting a good-faith estimate of closing costs.
Within
three working days after receipt of your completed
loan application, your mortgage company is
required to provide you with a written good-faith
estimate of closing costs.
Assuming
that the interest on your home credit line/loan
is tax deductible.
In
some instances, the interest on your home credit
line is NOT tax deductible. It is beyond the scope
of this document to provide tax advice or quote
from the IRS code. Contact an accountant or
CPA to determine your particular situation.
Assuming
a home equity line is always cheaper than a car
loan or a credit card.
A
credit card at 6.9% can be cheaper than a credit
line at 12%, even after the tax deduction. To
compare rates, compare the effective rate of your
credit line with the rate on a credit card or auto
loan.
Effective rate = rate * (1 -
tax bracket)
Example: If the rate
of the home equity credit line is 12% and your tax
bracket is 30%, your effective rateis12% * (1 - 0.3) = 12% * 0.7 = 8.4%
If your credit card is higher than 8.4%, the
credit line is cheaper.
Besides the interest rate, you may also want to
compare monthly payments and other terms of the
loan.
Getting
a home equity credit line if you plan to
refinance your first mortgage in the near
future.
Many
mortgage companies look at the combined loan
amounts (i.e., the first loan plus the equity
line/loan) even though they are refinancing only
the first mortgage. If you plan on
refinancing your first loan, check with your
mortgage company to determine if getting a second
line/loan will cause your refinance to be turned
down.
Getting
a home equity credit line to pay off your credit
cards if your spending is out of control!
When
you pay off your credit cards with your credit
line, don't put your home on the line by charging
large amounts on your credit cards again! If
you can't manage the plastic, get rid of it!
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