cfpb heloc booklet A Guide to Home Equity Loans and Lines of Credit

Home equity loans and lines of credit can be a great way to tap into your home's value, but it's essential to understand the basics before making a decision.

The Consumer Financial Protection Bureau (CFPB) recommends considering the interest rate and fees associated with a home equity loan or line of credit.

Home equity loans typically have a fixed interest rate, which can provide stability in your monthly payments, but may also limit your flexibility.

The CFPB warns that home equity lines of credit can have variable interest rates, which may increase your monthly payments if interest rates rise.

You can borrow up to 80% of your home's value, but the CFPB advises against borrowing more than 50% to avoid overextending yourself.

The CFPB also recommends carefully reviewing the terms and conditions of your loan or line of credit before signing.

A HELOC is a revolving line of credit secured by your home, similar to a credit card.

You can borrow up to your credit limit anytime during the draw period, which can last 10 years or more. You'll use special checks or a credit card to draw on your line of credit.

The draw period has different rules than the repayment period. During the draw period, you may only have to pay the interest on money you borrowed.

A HELOC has a variable APR, which is based on interest alone and doesn't include costs like points and other financing charges.

The lender approves you for up to a certain amount of credit, and you make payments only on the amount you borrow, not the full amount available.

Here are the key things a lender must disclose to you about a HELOC:

If you don't repay the line of credit as agreed, your lender can foreclose on your home.

The CFPB's Home Equity Line of Credit (HELOC) booklet is a valuable resource for homeowners who want to understand their rights and responsibilities when it comes to HELOCs.

A HELOC is a type of loan that allows homeowners to borrow money using the equity in their home as collateral. The loan is typically secured by a lien on the property.

To apply for a HELOC, you'll need to provide financial information, including your income, credit history, and debt obligations. This information will help the lender determine how much money you can borrow and what interest rate you'll qualify for.

The CFPB recommends that you carefully review the terms and conditions of your HELOC before signing the agreement. This includes understanding the interest rate, fees, and repayment terms.

You can apply for a HELOC through a bank, credit union, or other financial institution. Some lenders may also offer online applications or mobile apps to make the process easier.

Once you've been approved for a HELOC, you'll typically receive a loan agreement that outlines the terms of the loan. Be sure to read this document carefully and ask questions if you're unsure about anything.

The CFPB requires lenders to provide a truth-in-lending disclosure statement with the loan agreement. This statement will detail the costs and terms of the loan, including the annual percentage rate (APR) and fees.

Lender can charge certain fees when you get a HELOC. Some plans also require you to borrow a minimum amount each time, such as $300.

You can make payments on your HELOC during the draw period, and many HELOCs have minimum monthly payments based on your current balance.

Your lender might not allow you to take out additional credit under your HELOC plan if your home's value decreases significantly.

The lender might also freeze your ability to take out additional funds if your financial circumstances change and they don't believe you'll be able to make your payments.

Some HELOC plans require you to keep a minimum amount outstanding, while others require you to take an initial amount when the credit line is set up.

If you're unable to make payments, you may be eligible for a temporary reduction or suspension of payments, but you'll still be responsible for paying the interest that accrues during this time.

A lender must provide you with a written notice before charging a late fee, and you can request a one-time payment extension if you're experiencing financial hardship.

You can cancel your HELOC at any time, but you may be responsible for paying a prepayment penalty, which can range from 1% to 5% of the outstanding balance.

Entering the repayment period can be a significant shift in your financial responsibilities. After the draw period ends, you stop being able to borrow from your HELOC.

Your lender may set a schedule to repay the full balance, often over ten or 20 years. Monthly payments are often significantly higher once you enter repayment.

In some cases, you may have to pay back the whole amount you borrowed as soon as the repayment period begins. This can be a shock, especially if you're not used to making large payments.

HELOCs usually have a variable interest rate, so your payments may change from month to month. This can make it harder to budget and plan for the future.

You have a certain window of time to cancel your home equity loan or HELOC, and it's essential to understand the deadline to avoid any potential issues.

You have until midnight of the third business day to cancel your financing. Business days include Saturdays, but don't include Sundays or legal public holidays.

For a home equity loan, the clock starts ticking on the first business day after you sign the loan closing documents, get a Truth in Lending disclosure, and receive two copies of a Truth in Lending notice explaining your right to cancel the contract.

If you close on a Friday and get the disclosure and two copies of the right to cancel notice at your closing, you have until midnight on Tuesday to cancel.

For a HELOC, the three business days usually starts to run from when you open the plan, or when you receive all material disclosures, whichever occurs last.

Here's a quick rundown of the cancellation deadline for home equity loans and HELOCs:

If you didn't get the disclosure form or the two copies of the notice, or if the disclosure or notice was incorrect, you may have up to three years to cancel.

A home equity loan is a loan that's secured by your home, and it's sometimes called a second mortgage. You get the loan for a specific amount of money, usually as a lump sum upfront.

Many lenders prefer that you borrow no more than 80 percent of the equity in your home. You typically repay the loan with equal monthly payments over a fixed term.

If you choose an interest-only loan, your monthly payments go toward paying the interest you owe, and you're not paying down any of the principal. This can lead to a large balloon payment due at the end of the loan, which may require a new loan to pay off over time.

A home equity loan is a loan that's secured by your home, and it's also sometimes called a second mortgage.

You get the loan for a specific amount of money and usually get the money as a lump sum upfront. Many lenders prefer that you borrow no more than 80 percent of the equity in your home.

The interest rate on a home equity loan is typically fixed, and it includes interest and other credit costs. This is often referred to as the annual percentage rate (APR).

You'll typically repay the loan with equal monthly payments over a fixed term. But if you choose an interest-only loan, your monthly payments go toward paying the interest you owe, and you're not paying down any of the principal.

If you don't repay the loan as agreed, your lender can foreclose on your home. And if you choose an interest-only loan, you'll usually have a lump-sum or balloon payment due at the end of the loan, which can be large because it includes the unpaid principal balance and any remaining interest due.

When you're closing on a home equity loan or HELOC, make sure to read the loan closing papers carefully. Don't sign anything until you're satisfied with the terms.

If the financing isn't what you expected or wanted, don't be afraid to negotiate changes or reject the offer altogether. This is your chance to ensure you're getting a good deal.

The lender must return all fees you paid in connection with the application, such as credit report or appraisal fees, if you decide not to take the loan due to a change in terms. This is a consumer protection law that's in place to protect you.

Be wary of last-minute emails from your loan officer or real estate professional claiming there's been a change in the loan terms. It's likely a scam.

Don't wire money in response to an unexpected email, as it's hard to get your money back once it's been sent. If you get an email like this, contact your lender, broker, or real estate professional at a number or email address you know is real.

If you've taken out a HELOC, you have certain rights that protect you from lender abuse. You have the right to keep your account open without the lender demanding you pay off your outstanding balance sooner than agreed upon.

The lender may not close your account or change the terms of your agreement if you make your payments as agreed. This is a key part of your contract, and it's essential to review it carefully.

If the lender freezes or reduces your line of credit, you have options. You can talk to them about restoring your line of credit, or you can explore other options like getting another line of credit or shopping around for a new mortgage.

In some cases, the lender may stop credit advances on your account if interest rates exceed the maximum rate stated in your agreement. This is another important aspect of your contract to understand.

Here are some situations where the lender may freeze or reduce your line of credit: