If you decide to apply for a home equity line, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine that terms and conditions of various plans, including the annual percentage rate (APR) and the costs you’ll pay to establish the plan. The disclosed APR will not reflect the closing costs and other fees and charges, so you’ll need to compare these costs, as well as the APR’s among lenders.

Interest Rate Charges and Plan Features

Home equity plans typically involve variable interest rates rather than fixed rates. A variable rate must be based on a publicly available index (such as the prime rate 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 2 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 may increase, and also how low your interest rate may fall if interest rates drop.

Some lenders may permit you to convert all or a portion of your line to a fixed-term installment loan.

Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to get additional funds during any period the interest rate reaches the cap.

Costs to Obtain a Home Equity Line

May of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. For example:

• A fee for a property appraisal, which estimates the value of your home.

• An application fee, which may not be refundable if you are turned down for credit.

• Up-front charges, such as one or more points (one point equals one percent of the credit limit).

• Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes.

• Certain fees during the plan. For example, some plans impose yearly membership or maintenance fees.

• You also may be charged 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 charges and closing costs would substantially increase the cost of the cost of the Funds borrowed. On the other hand, the lender’s risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all the closing costs.

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