Home Equity Fees
and Terms Explained
A home equity line of credit is a great way to leverage the equity in your home to work for you. A HELOC allows homeowners access to a flexible line of credit that can be used for everything from home repairs to debt consolidation.
We’ll go over all of the home equity fees and terms that you might see during the lending process.
Home Equity Terms
The following are the top home equity line of credit terms you may come across during the process.
Application
The home equity line of credit application process typically involves visiting your local bank branch or credit union to complete paperwork and submitting information about your income, employment history, other outstanding debts, current property, and mortgage. For some types of home equity lines of credit offered by UCCU, members can apply completely online.
Rate Index
A rate index is a benchmark used to help calculate the interest rate you may receive, such as the federal prime rate. Your home equity line of credit interest rate will most likely be based on the prime rate plus a markup.
Rate Cap
A rate cap is a set number that ensures your interest rate will not rise above a certain amount and protects you against rising interest rates. It may be for an introductory period or even for the lifetime of the loan. This can be a great perk to look for when shopping for a home equity line of credit. Always keep an eye on rates and yields as they can fluctuate up and down based on the market.
Draw Period
A draw period refers to the amount of time that you have access to your line of credit. Unlike a loan, you can draw from your home equity line of credit at any point during the draw period and even make withdrawals repeatedly as you pay down your balance. A draw period is typically fixed and averages around ten years.
Markups
A markup is the difference between the base rate and the final interest rate that you will pay. This is also sometimes referred to as the margin. The amount of markup will be based on your credit score and other factors from your financial situation.
Markup Increases
Markup increases refer to an increase in the amount of margin or markup on your rate. Unless you have a fixed interest rate, your rate can be subject to markup increases.
Initial Draw Requirement
Your lender may require a specific amount for your initial withdrawal. This is known as an initial draw requirement or an initial minimum draw. UCCU does not have an initial draw requirement.
Balloon Payment
A balloon payment is a large lump sum that is often due at the end of your HELOC’s draw period. Unlike a credit card, your line of credit has an end date. Some banks will require a balloon payment to pay off your remaining balance when your line of credit comes to a close.
Repayment Period
Alternatively, you may have a repayment period at the end of your draw period in which you no longer have access to withdraw funds but can continue making low monthly payments to pay down your outstanding balance. Your interest rate during this period may be fixed or adjustable.
Related: Home Equity Line of Credit Uses
Home Equity Fees
You will also want to familiarize yourself with these fees often associated with home equity lines of credit.
Recording
Recording is a step in the home equity line of credit process in which public records are updated to reflect the new changes in your property ownership and record the new lien. There may be county recording fees involved as part of your home equity line of credit closing costs.
Closing Costs
Closing costs refer to all of the fees and other costs involved in closing a lending product such as a home equity line of credit or a refinance. This typically includes processing fees, appraisal fees, and underwriting fees.
Title Fees
You may have title search fees and title insurance fees as part of your closing costs. Since you are using your property as collateral to open your home equity line of credit, home equity line of credit lenders must perform a title search to check for any other outstanding liens. Title fees can be anywhere between $100 to $450, depending on your local jurisdiction.
Appraisal
An appraisal is an official determination of the value of a property. Data is gathered about the size of the home, the condition of the home, property values in the neighborhood, and other factors. During the home equity line of credit process, you will most likely need to undergo a new appraisal of your home. There will be associated fees with obtaining this appraisal.
Prepayment Fees
Also known as an early termination fee, this fee may be charged if you close your account before a specified date, such as the end of your draw period.
Inactivity
Many lenders also charge inactivity or nonuse fees if you aren’t utilizing your available line of credit. Like a maintenance fee, these can be monthly or annual service fees.
Fees and Terms: Learn More
A home equity line of credit can be a smart financial decision for many homeowners.
Talk to a UCCU Home Equity Expert today to review your options and determine which home equity line of credit is best for you, or click below to learn more.