Equity Line Advantage Disclosure
This disclosure contains important information about our Home Equity Line of Credit. 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 paid to us or anyone else in connection with your application.
SECURITY INTEREST: We will take a mortgage on your home. You could lose your home if you do not meet the obligations in your agreement with us.
POSSIBLE ACTIONS: Under certain circumstances, we can (1) terminate your account and require you to pay us the entire outstanding balance in one payment; (2) refuse to make additional extensions of credit; and (3) reduce your credit limit.
We can terminate your account and require you to pay us the entire outstanding balance in one payment if: (1) you engage in fraud or material misrepresentation in connection with the plan; (2) you do not meet the repayment terms; 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) you engage in fraud or material misrepresentation in connection with the account; (2) you do not meet the repayment terms; (3) your action or inaction adversely affects the collateral or our rights in the collateral; (4) the value of the dwelling securing the line declines significantly below its appraised value for purposes of the line; (5) we reasonably believe you will not be able to meet the repayment requirements due to a material change in your financial circumstances; (6) you are in default of a material obligation of the agreement; (7) government action prevents us from imposing the annual percentage rate provided for or impairs our security interest such that the value of the interest is less than 120 percent of the credit line; (8) a regulatory agency has notified us that continued advances would constitute an unsafe and unsound business practice; or (9) the maximum annual percentage rate is reached.
MINIMUM PAYMENT REQUIREMENTS: You can obtain credit advances for 60 months ("Draw Period") as long as the total of the advances does not exceed the loan amount. During this period, payments will be due monthly. Your minimum monthly payment will equal the amount of accrued interest only ("First Payment Stream"). The minimum monthly payments during the First Payment Streem will not reduce the principal that is outstanding on your account by the end of 60 months.
After completion of the Draw Period and First Payment Stream, your regular payment will be based on a percentage of your outstanding balance ("Second Payment Stream") for the remaining 120 months ("Repayment Period"). Your payments will be due monthly and will consist of principal and interest to retire the full balance at the end of the Repayment Period ("Maturity Date").
MINIMUM PAYMENT EXAMPLE: If you made only the minimum monthly payment, took no other credit advances, and the INDEX RATE stayed at 3.25%, it would take you 180 months to pay off a credit advance of $10,000.00. During that period, you would make 60 payments of $ 28.00 per month and payments of $103.64 per month for months 61-179. The final payment would then be due on the Maturity Date for $103.35.
FEES AND CHARGES: To open and maintain an account, the following fees may apply: Maintenance Fee: $50.00 due annually and an origination fee: $250.00. You may also have to pay certain fees to third parties such as appraisers, credit reporting firms, and government agencies. These fees generally total $0.00 to $500.00. The types of fees you are charged and the amounts vary depending on your specific loan terms. If you ask, we will provide you with an itemization of the fees you will have to pay. If your loan does not close, you must reimburse the Lender for any third party charges incurred. The property that secures this loan must be insured.
REFUNDABILITY OF FEES: If you decide not to enter into this loan within three days of receiving this disclosure and the Home Equity Booklet, you are entitled to a refund of any fees you may have already paid.
MINIMUM DRAW REQUIREMENTS: The minimum credit advance that you can receive is $250.00.
TAX DEDUCTIBILITY: You should consult a tax advisor regarding the deductibility of interest and charges for this loan.
VARIABLE RATE FEATURES: This loan has a variable rate feature and the annual percentage rate (corresponding to the periodic rate) and the minimum monthly payment can change as a result. The annual percentage rate is based on the value of an index. The index is the highest rate on corporate loans posed by at least 75% of the USA’s thirty largest banks known as The Wall Street Journal Prime Rate and is published in The Wall Street Journal. To determine the annual percentage rate that will apply to your loan, we add a margin to the value of the index, and then round up to the nearest 0.125%. Ask us for the current index value, margin, discount, and interest rate. After you open a credit account, rate information will be provided on periodic statements that we send to you.
RATE CHANGES: The interest rate can change monthly. There is no limit on the amount by which the rate can change in any one month or one year period. The maximum interest rate that can apply during the plan is 21.00%. Your ANNUAL PERCENTAGE RATE will never decrease below the start rate plus a margin.
MAXIMUM RATE AND PAYMENT EXAMPLES: If you had an outstanding balance of $10,000.00, the minimum monthly payment at the maximum interest rate of 21.00% would be $175.00 during the First Payment Stream and $199.93 during the Second Payment Stream with a final payment of $200.66 due on the Maturity Date.
HISTORICAL EXAMPLES: The following table shows how the annual percentage rate and the minimum payments for a single $10,000.00 credit advance would have changed based on changes in the index over that last 15 years. The index values are from the first business day of November. The table assumes that no additional credit advances were taken, that only the minimum payment was made, and that the rate remained constant during each year. It does not necessarily indicate how the index or your payments would change in the future.
*This is an interest rate we have used recently; your margin may be different.
What You Should Know
About Home Equity Lines of Credit
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 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,
Appraised value of home – $100,000
Percentage – x 75%
Percentage of appraised value – = $75,000
Less balance owed on mortgage – -$40,000
Potential Credit – $35,000
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.
- 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 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.
Where to Go For Help
For additional information or to file a complaint, contact the following federal agency:
Office of the Comptroller of the Currencey (OCC)
Customer Assistance Group
1301 McKinney Street, Suite 3450
Houston, TX 77010