Keep a Home Equity Line of Credit on Standby

by Joe Taylor Jr.
CMR Columnist

Many Americans tend to worry about getting a second mortgage only after a major event like a marriage, a birth, or a medical emergency. Refinancing or taking out a home equity loan under pressure can force you to accept a less than perfect deal. Arranging for a home equity line of credit during your mortgage broker's slow period can help you make sure there's funding when you need it on terms that you can afford.

A home equity line of credit is a flexible tool that you can use to borrow money when you need it. Unlike refinancing your mortgage or taking out a home equity loan, where you get a large disbursement of cash up front, you can usually access a home equity line of credit using convenience checks or secure online transfers.

Your lender can make your line of credit available to you at predetermined rates and terms for up to ten years. In most cases, it costs nothing to set up a home equity line of credit, and you only pay interest when you have actually accessed funds. Having a home equity line of credit on standby can reduce your need for refinancing in a hurry if you need to access cash in a crisis.

Like mortgage refinance rates, the annual percentage rate you'll pay on a home equity line of credit will fluctuate along with the prime rate. However, the "spread" -- the difference between the prime rate and the rate you end up paying -- will be determined by your credit history and by the relationship you have with your lender. Opening your home equity line of credit when your credit score is high and when your mortgage lender is actively looking for your business can help you secure the lowest rates possible.

Sources
Clark Howard
Federal Reserve Board
Federal Trade Commission

About the Author
Joe Taylor Jr. coaches musicians, entrepreneurs, and other adults that want to shift their careers. He holds a Bachelor of Science in Communications from Ithaca College.

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