HOME EQUITY EARLY DISCLOSURE
IMPORTANT TERMS OF OUR HOME EQUITY LINE OF CREDIT PLAN
This disclosure contains important information about our Home Equity Line of Credit Plan. You should read it carefully and keep a copy for your records.
AVAILABILITY OF TERMS: All of the terms described below are subject to change. If these terms change (other than the annual percentage rate) and you decide, as a result, not to enter into an agreement with us, you are entitled to a refund of any fees that you pay to us or anyone else in connection with your application.
SECURITY INTEREST: We will take a security interest in your home. You could lose your home if you do not meet the obligations in your agreement with us.
POSSIBLE ACTIONS: We can terminate your line, require you to pay us the entire outstanding balance in one payment, and charge you certain fees, If (1) you engage in fraud or material misrepresentation in connection with the plan; (2) you do not meet the repayment terms of this plan, or (3) your action or inaction adversely affects the collateral or our rights in the collateral.
We can refuse to make additional extensions of credit or reduce your credit limit if (1) any reasons mentioned above exist; (2) the value of the dwelling securing the line declines significantly below its appraised value for purposes of the line; (3) we reasonably believe that you will not be able to meet the repayment requirements due to a material change in your financial circumstances; (4) you are in default of a material obligation of the agreement; (5) government action prevents us from imposing the annual percentage rate provided for in the agreement; (6) the priority of our security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; (7) a regulatory agency has notified us that continued advances would constitute an unsafe and unsound business practice, or (8) the maximum annual percentage rate is reached.
MINIMUM PAYMENT REQUIREMENTS: You can obtain credit advances for 10 years. This period is called the "draw period." At our option, we may renew or extend the draw period. The length of the repayment period will be 15 years. You will be required to make payments during the draw and repayment periods. Your payment will be $1.45/$100 or portion of $100.00 if you elect credit insurance; $1.30/$100.00 if you do not elect credit insurance, of the outstanding balance at the time you obtain an advance or $100.00, whichever Is greater. If your outstanding balance is in excess of an even $100.00, the amount will be rounded to the next even $100.00 for payment calculation. Your payment will include any amounts past due and any amount by which you have exceeded your credit limit, and all other charges. We will recalculate your payment each time you obtain an advance.
If the interest rate increases. you will be required to make more payments of the same amount until the end of the repayment period. If the ANNUAL PERCENTAGE RATE exceeds 13.5% for longer than one full monthly rate change cycle, the factor will increase to $1.85/$100 (with credit insurance election), $1.70/$100 (without credit insurance). If the ANNUAL PERCENTAGE RATE decreases to less than 13.5% the factor will revert to the original figure. These events could change your payment at times other than after subsequent advances. If this happens we will provide notice to you.
[The minimum payment may not repay the outstanding balance by the end of the repayment period. You will then be required to make a single balloon payment at the maturity date. Unless otherwise required by applicable law, we are under no obligation to refinance the balloon payment at that time. You may be required to make payments out of other assets you own or find a lender, which may be us, willing to lend you the money. If you refinance the balloon with us, you may have to pay some or all of the closing costs.]
MINIMUM PAYMENT EXAMPLE: If you made only the minimum monthly payment and took no other credit advances it would take 7 years 9 months to pay off a credit advance of $10,000 at an ANNUAL PERCENTAGE RATE of 5%. During that period, you would make 92 payments of $130.00 and one (1) final payment of $122.49.
FEES AND CHARGES: You must pay certain fees to third parties to open the plan. These fees generally total between $100.00 and $1,000.00. If you ask, we will provide you with an itemization of the fees you will have to pay third parties.
PROPERTY INSURANCE: You must carry insurance on the property that secures this plan. If the property is located in a Special Flood Hazard Area we will require you to obtain flood insurance if it is available.
TRANSACTION REQUIREMENTS: The minimum credit advance that you can receive is $500.00 for the first advance and $100.00 for each subsequent advance, if requested by direct contact with the Credit Union office. There is no subsequent minimum amount when advance requests are made by remote means.
TAX DEDUCTIBILITY; You should consult a tax advisor regarding the deductibility of interest and charges for the plan.
ADDITIONAL HOME EQUITY PLANS: Please ask us about our other available home equity line of credit plans.
VARIABLE RATE FEATURE: This plan has a variable rate feature and the annual percentage rate (corresponding to the periodic rate) and the minimum payment may change as a result. The annual percentage rate includes only interest and no other costs.
The annual percentage rate is based on the value of an index. The index is the Prime Rate published in the Money Rates column of the Wall Street Journal. When a range of rates has been published the highest rate will be used. We will use the most recent index value available to us as of 1 day before the date of any annual percentage rate adjustment.
To determine the annual percentage rate that will apply to your account, we add a margin to the value of the Index. Ask us for the current index value, margin, and annual percentage rate. After you open a plan, rate information will be provided on periodic statements that we send you.
RATE CHANGES: The annual percentage rate can change on the last day of each month. There is no limit on the amount by which the annual percentage rate can change during any one year period. The maximum ANNUAL PERCENTAGE RATE that can apply is 18% or the maximum permitted by law, whichever is less. However, under no circumstances will your ANNUAL PERCENTAGE RATE go below 4% at anytime during the term of the plan.
MAXIMUM RATE AND PAYMENT EXAMPLES: If you had an outstanding balance of $10,000, the minimum payment at the maximum ANNUAL PERCENTAGE RATE of 18% would be $170.00. This annual percentage rate could be reached at the time of the 1st payment.
HISTORICAL EXAMPLE: The following table shows how the annual percentage rate and the minimum payments for a single $10,000 credit advance would have changed based on changes in the index over the past 15 years.
The index values are from the last business day of July of each year. While only one payment per year is shown, payments may have varied during each year.
The table assumes that no additional credit advances were taken, that only the minimum payments were made, and that the rate remained constant during each year. It does not necessarily indicate how the index or your payments will change in the future.
|WALL STREET JOURNAL PRIME RATE INDEX TABLE|
|Year(as of the last business day of July)||Index(percent)||Margin(1)(Percent)||ANNUAL PERCENTAGE RATE||Monthly Payment (Dollars)|
(1)This is a margin we have used recently; your margin may be different.
(2)This ANNUAL PERCENTAGE RATE reflects a discount that we have provided recently, your plan may be discounted by a different amount.
CUNA MUTUAL INSURANCE SOCIETY, 1992, 1999 All RIGHTS RESERVED . SPECIAL EED002 301420 08/31/2005
More and more lenders are offering home equity lines of credit. By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax law--depending on your specific situation--you may be allowed to deduct the interest because the debt is secured by your home.
If you are in the market for credit, a home equity plan may be right for you. Or perhaps another form of credit would be better. Before making a decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And remember, failure to repay the amounts you've borrowed, plus interest, could mean the loss of your home.
What is a home equity line?
What should you look for?
How will you repay your home equity plan?
Lines of credit vs. traditional second mortgage loans
Disclosures from lenders
What is a home equity line of credit?
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.
With a home equity line, you will be approved for a specific amount of credit--your credit limit, the maximum amount you may borrow at any one time under the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the home's appraised value and subtracting from that the balance owed on the existing mortgage. For example,
In determining your actual credit limit, the lender will also consider your ability to repay, by looking at your income, debts, and other financial obligations as well as your credit history.
Many home equity plans set a fixed period during which you can borrow money, such as 10 years. At the end of this "draw period," you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period (the "repayment period"), for example, 10 years.
Once approved for a home equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. Typically, you will use special checks to draw on your line. Under some plans, borrowers can use a credit card or other means to draw on the line.
There may be limitations on how you use the line. Some plans 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. Some plans may also require that you take an initial advance when the line is set up.
What should you look for when shopping for a plan?
If you decide to apply for a home equity line of credit, look for the plan that best meets your particular needs. Read the credit agreement carefully, and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs of establishing the plan. The APR for a home equity line is based on the interest rate alone and will not reflect the closing costs and other fees and charges, so you'll need to compare these costs, as well as the APRs, among lenders.
Interest rate charges and related plan features
Home equity lines of credit typically involve variable rather than fixed interest rates. The variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate); the interest rate for borrowing under the home equity line changes, mirroring fluctuations in the value of the index. Most lenders cite the interest rate you will pay as the value of the index at a particular time plus a "margin", such as 2 percentage points. Because the cost of borrowing is tied directly to the value of the index, it is important to find out which index is used, how often the value of the index changes, and how high it has risen in the past as well as the amount of the margin.
Lenders sometimes offer a temporarily discounted interest rate for home equity lines--a rate that is unusually low and may last for only an introductory period, such as 6 months.
Variable-rate plans secured by a dwelling must, by law, have a ceiling (or cap) on how much your interest rate may increase over the life of the plan. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop.
Some lenders allow you to convert from a variable interest rate to a fixed rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.
Plans generally permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to draw additional funds during a period in which the interest rate reaches the cap.
Costs of establishing and maintaining a home equity line
Many of the costs of setting up a home equity line of credit are similar to those you pay when you buy a home. For example,
- A fee for a property appraisal to estimate the value of your home
- An application fee, which may not be refunded if you are turned down for credit
- Up-front charges, such as one or more points (one point equals 1 percent of the credit limit)
- Closing costs, including fees for attorneys, title search, and mortgage preparation and filing; property and title insurance; and taxes.
In addition, you may be subject to certain fees during the plan period, such as annual membership or maintenance fees and a transaction fee every time you draw on the credit line.
You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those initial charges would substantially increase the cost of the funds borrowed. On the other hand, because the lender's risk is lower than for other forms of credit, as your home serves as collateral, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the costs of establishing and maintaining the line. Moreover, some lenders waive some or all of the closing costs.
How will you repay your home equity plan?
Before entering into a plan, consider how you will pay back the money you borrow. Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But (unlike with the typical installment loan) the portion that goes toward principal may not be enough to repay the principal by the end of the term. Other plans may allow payment of interest alone during the life of the plan, which means that you pay nothing toward the principal. If you borrow $10,000, you will owe that amount when the plan ends.
Regardless of the minimum required payment, you may choose to pay more, and many lenders offer a choice of payment options. Many consumers choose to pay down the principal regularly as they do with other loans. For example, if you use your line to buy a boat, you may want to pay it off as you would a typical boat loan.
Whatever your payment arrangements during the life of the plan--whether you pay some, a little, or none of the principal amount of the loan--when the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this "balloon payment" by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.
If your plan has a variable interest rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a plan that calls for interest-only payments. At a 10 percent interest rate, your monthly payments would be $83. If the rate rises over time to 15 percent, your monthly payments will increase to $125. Similarly, if you are making payments that cover interest plus some portion of the principal, your monthly payments may increase, unless your agreement calls for keeping payments the same throughout the plan period.
If you sell your home, you will probably be required to pay off your home equity line in full immediately. If you are likely to sell your home in the near future, consider whether it makes sense to pay the up-front costs of setting up a line of credit. Also keep in mind that renting your home may be prohibited under the terms of your agreement.
Lines of credit vs. traditional second mortgage loans
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.
- Annual membership or maintenance fee
- An annual charge for having the line of credit available. Charged regardless of whether or not the line is used.
- Annual percentage rate (APR)
- The cost of credit on a yearly basis expressed as a percentage.
- Application fee
- Fees that are paid upon application. May include charges for property appraisal and a credit report.
- Balloon payment
- A lump-sum payment that may be required when the plan ends.
- A limit on how much the variable interest rate may increase during the life of the plan.
- Closing costs
- Fees paid at closing, including attorneys fees, fees for preparing and filing a mortgage, fees for title search, taxes, and insurance.
- Credit limit
- The maximum amount that may be borrowed under the home equity plan.
- The difference between the fair market value (appraised value) of the home and the outstanding mortgage balance.
- Published rate that serves as a base for the interest rate charged on a home equity line and also as the base for rate changes used by the lender.
- Interest rate
- The periodic charge, expressed as a percentage, for use of credit.
- The number of percentage points the lender adds to the index rate to determine the annual percentage rate.
- Minimum payment
- The minimum amount that you must pay (usually monthly) on your account. Under some plans, the minimum payment may cover interest only; under others, it may include both principal and interest.
- One point is equal to 1 percent of the amount of the credit line. Points must usually be paid at closing and are in addition to monthly interest.
- Security interest
- An interest that a lender takes in the borrower's property to ensure repayment of a debt.
- Transaction fee
- A fee charged each time you draw on your credit line.
- Variable rate
- An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
Where to Go for Help
The following federal agencies are responsible for enforcing the federal Truth in Lending Act, the law that governs disclosure of terms for home equity lines of credit. Questions concerning compliance with the act by a particular financial institution should be directed to the institution's enforcement agency.
State Banks that Are Members of the Federal Reserve System
Division of Consumer and Community Affairs
Mail Stop 801
Federal Reserve Board
Washington DC 20551
Office of the Comptroller of the Currency
Customer Assistance Unit
1301 McKinney St.
Houston, TX 77010
Federal Credit Unions
National Credit Union Administration
Office of Public and Congressional Affairs
1775 Duke St.
Alexandria, VA 22314
Federally Insured Non-Member State-Chartered Banks and Savings Banks
Federal Deposit Insurance Corporation
Office of Compliance and Consumer Affairs
550 17th Street, NW
Room PA-1730, 7th Floor
Washington, DC 20429
(202) 942-3100 or (800) 934-FDIC
Federally Insured Savings and Loan Institutions and Federally Chartered Savings Banks
Office of Thrift Supervision
1700 G Street, NW, 6thFloor
Washington, DC 20552
(202) 906-6237 or(800) 842-6929
Mortgage Companies and Other Lenders
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
(202) 326-3758 or (877) FTC-HELP
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Last update: July 25, 2001 The material on this site is adapted from the brochure "When Your Home Is on the Line." Single or multiple copies of the brochure are available without charge. Order the brochure by telephone, mail, or fax.