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Repaying
Your Home Equity Credit Line |
Before entering into a plan,
consider how you will pay back any money you borrow. Some
plans set minimum payments that cover a portion of the principal
(the amount you borrow) plus accrued interest. But unlike
the typical installment loan, the portion that goes toward
principal may not be enough to repay the debt by the end of
the term. Other plans may allow payments 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 entire sum when the plan ends.
Regardless of the minimum payment required, you can pay more
than the minimum and many lenders may give you a choice of
payment options. Consumers often will choose to pay down the
principal regularly as they do with other loans.
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.
Monthly Interest Payments
With a variable 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% interest rate, your initial
payments would be $83 monthly. If the rate should rise to
15%, your payments will increase to $125 per month. Even with
payments that cover interest plus a portion of the principal,
there could be a similar increase in your monthly payment,
unless the agreement calls for keeping payments level throughout
the plan.
Selling Your Home
When you sell your home, you probably will be required to
pay off your home equity line in full. If you are likely to
sell your house in the near future, consider whether it makes
sense to pay the up-front costs of setting up an equity credit
line. Also keep in mind that leasing your home may be prohibited
under the terms of your home equity agreement. |
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