Variable Rate Home Equity Loans

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.

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.

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.

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.

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.

Be careful and go into any variable interest rate loan with your eyes wide open.




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