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Interest
Rates on a Home Equity Credit Line |
Home equity plans typically
involve variable interest rates rather than fixed ones. A
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 will change,
mirroring fluctuations in the index.
To figure the interest rate that you will pay, most lenders
add a margin, such as two percentage points, to the index
value. Because the cost of borrowing is tied directly to the
index rate, it is important to find out what index and margin
each lender uses, how often the index changes, and how high
it has risen in the past.
Sometimes lenders advertise a temporarily discounted rate
for home equity lines -- a rate that is unusually low and
often lasts only for an introductory period, such as six months.
Variable rate plans secured by a dwelling must have a ceiling
(or cap) on how high your interest rate can climb over the
life of the plan. Some variable rate plans limit how much
your payment can increase and also how low your interest rate
can fall if interest rates drop.
Some lenders might permit you to convert a variable rate to
a fixed interest rate during the life of the plan, or to convert
all or a portion of your line to a fixed-term installment
loan.
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Agreements generally will permit the lender to freeze or reduce
your credit line under certain circumstances. For example,
some variable rate plans might not allow you to get additional
funds during any period the interest rate reaches the cap. |
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