This disclosure contains important information about our Home Equity Line of Credit. You should read it carefully and keep a copy for your records.

1. AVAILABILITY OF TERMS. All of the terms described below are subject to change. If these terms change (other than the annual percentage rate), and you decide, as a result, not to enter into an agreement with us, you are entitled to a refund of any fees that you have paid to us or anyone else in connection with your application.
2. SECURITY INTEREST. We will take a security interest in your home. You could lose your home if you do not meet the obligations in your agreement with us.
3. POSSIBLE ACTIONS. Under certain circumstances, we can:
1. Terminate your line of credit and require you to pay us the entire outstanding balance in one payment.
2. Refuse to make additional extensions of credit; and
3. Reduce your credit limit.

We can terminate your line of credit and require you to pay us the entire outstanding balance in one payment if:
1. You engage in fraud or material misrepresentation in connection with the line of credit;
2. You fail to make a payment as required by the agreement; or
3. Your action or inaction adversely affects the collateral or our rights in the collateral

We can refuse to make additional extensions of credit or reduce your credit limit if:
1. The value of the dwelling securing the line of credit declines significantly below its appraised value for purposes of the line of credit;
2. We reasonably believe you will not be able to meet the repayment requirements under the line of credit due to a material change in your financial circumstances;
3. You are in default of a material obligation of the agreement;
4. Government action prevents us from imposing the annual percentage rate provided for in the agreement, or impairs our security interest such that the value of the interest is less than 120 percent of the credit limit on the line of credit;
5. A regulatory agency has notified us that continued advances would constitute an unsafe and unsound practice;
6. The maximum annual percentage rate is reached; or
7. You are an executive officer of a financial institution and the total amount of credit outstanding exceeds the limits established by applicable laws or regulations for extension of credit to executive officers of financial institutions.


4. MINIMUM PAYMENT REQUIREMENTS. You can obtain credit advances for 10 years. During this period, payments will be due monthly. Your minimum monthly payment will equal the following:
• $25.00; or
• 1.5% of the outstanding balance of your line of credit, whichever is larger.

The minimum payment amount will be rounded up to the nearest $1.00. Whenever a flat dollar amount is used to determine the minimum payment however, the minimum payment will be rounded to the nearest $.01. The minimum monthly payments may not be sufficient to fully repay the principal that is outstanding on your line of credit at the end of 10 years. If they are not, you will then be required to pay the entire balance in a single payment.
5. MINIMUM PAYMENT EXAMPLE. If you made only the minimum monthly payment and took no other credit advances, it would take 10 years to pay off a credit advance of $10,000.00 at an ANNUAL PERCENTAGE RATE of 8.00%. During that period, you would make 119 payments varying between $150.00 and $56.00, with a final payment of $3681.61.
6. FEES AND CHARGES. You must carry insurance on the property that secures the line of credit.
7. REFUNDABILITY OF FEES. If you decide not to enter into this plan within three days of receiving this disclosure and the Home Equity Booklet, you are entitled to a refund of any fee you may have already paid.
8. MINIMUM DRAW REQUIREMENTS. The minimum initial credit advance must be at least $1000.00.
9. TAX DEDUCTIBILITY. You should consult a tax advisor regarding the deductibility of interest and charges for the line of credit.
10. VARIABLE RATE FEATURES. This line of credit has a variable rate feature and the annual percentage rate (corresponding to the periodic rate) and the minimum monthly payment can change as a result. The annual percentage rate includes only interest and not other costs. The annual percentage rate is based on the value of an index. The index is the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks known as the Wall Street Journal Prime Rate and is published in the Wall Street Journal. To determine the annual percentage rate that will apply to your line of credit, we add a margin to the value of the index. Ask us for the current index value, margin, and annual percentage rate. After you open a line of credit, rate information will be provided on periodic statements that we send you.
11. RATE CHANGES. The annual percentage rate can change quarterly. There is no limit on the amount by which the rate can change in any on year period. The maximum ANNUAL PERCENTAGE RATE that can apply during the line of credit is 18.000 percent.
12. MAXIMUM RATE AND PAYMENT EXAMPLES. If you had an outstanding balance of $10,000.00 the minimum monthly payment at the maximum ANNUAL PERCENTAGE RATE of 18.000 percent would be $150.00. The maximum annual percentage rate could be reached in the 1st month (1 month) following an initial hold of 3 months.
13. HISTORICAL EXAMPLES. The following table shows how the annual percentage rate and the minimum payments for a single $10,000.00 credit advance would have changed based on changes in the index over the last 15 years. The index values are from the first business day of November. While only one payment amount per year is shown, payments would have varied during each year. The table assumes that no additional credit advances were taken, that only the minimum payment was made, and that the rate remained constant during each year. It does not necessarily indicate how the index or your payments would change in the future.
    

What You Should Know About Home Equity Lines of Credit

More and more lenders are offering home equity lines of credit. By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax law – depending on your specific situation – you may be allowed to deduct the interest because the debt is secured by your home. If you are in the market for credit, a home equity plan may be right for you. Or perhaps another form of credit would be better. Before making a decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And remember, failure to repay the amounts you’ve borrowed, plus interest, could mean the loss of you home.

What is a home equity line of credit?

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit – your credit limit, the maximum amount you may borrow at any one time under the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage. For example:

Appraised value of home $100,000
Percentage x 75%
Percentage of Appraised value = $75,000
Less balance owed on mortgage -$40,000
Potential credit $35,000

In determining your actual credit limit, the lender will also consider your ability to repay by looking at your income, debts, and other financial obligations as well as your credit history.

Many home equity plans set a fixed period during which you can borrow money, such as 10 years. At the end of this “draw period,” you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period (the “repayment period”), for example, 10 years.

Once approved for a home equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. Typically you will use special checks to draw on your line. Under some plans, borrowers can use a credit card or other means to draw on the line.

There may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some plans may also require that you take an initial advance when the line is set up.

If you decide to apply for a home equity line of credit, look for the plan that best meets your particular needs. Read the credit agreement carefully, and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs of establishing the plan. The APR for a home equity line is based on the interest rate alone and 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.

Home equity lines of credit typically involve variable rather than fixed interest rates. The 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 for borrowing under the home equity line changes, mirroring fluctuations in the value of the index. Most lenders cite the interest rate you will pay as the value of the index at a particular time plus a “margin,” such a 2 percentage points. Because the cost of borrowing is tied directly to the value of the index, it is important to find out which index is used, how often the value of the index changes, and how high it has risen in the past as well as the amount of the margin.

Lenders sometimes offer a temporarily discounted interest rate for home equity lines-a rate that is unusually low and may last for only an introductory period, such as 6 months.

Variable-rate plans secured by a dwelling must, by law, have a ceiling (or cap) on how much your interest rate may increase over the life of the plan. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop.

Some lenders allow you to convert from a variable interest rate to a fixed rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.

Plans generally permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to draw additional funds during a period in which the interest rate reaches the cap.

Many of the costs of 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 to estimate the value of your home.
• An application fee, which may not be refunded 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).
• Closing costs, including fees for attorneys, title search, and mortgage preparation and filing; property and title insurance; and taxes. In addition, you may be subject to certain fees during the plan period, such as annual membership or maintenance fees and 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 initial charges would substantially increase the cost of the funds borrowed. On the other hand, because the lender’s risk is lower than the other forms of credit, as your home serves as collateral, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the costs of establishing and maintaining the line. Moreover, some lenders waive some or all of the closing costs.

How will you repay your home equity plan?

Before entering into a plan, consider how you will pay back the 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 principal by the end of the term. Other plans may allow payment 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 amount when the plan ends.

Regardless of the minimum required payment, you may choose to pay more, and many lenders offer a choice of payment options. Many consumers choose to pay down the principal regularly as they do with other loans. For example, if you use your line to buy a boat, you may want to pay it off as you would a typical boat loan.

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.

If your plan has a variable interest 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 percent interest rate, your monthly payments would be $83. If the rate rises over time to 15 percent, your monthly payments will increase to $125. Similarly, if you are making payments that cover interest plus some portion of the principal, your monthly payments may increase, unless your agreement calls for keeping payments the same throughout the plan period.

If you sell your home, you will probably be required to pay off your home equity line in full immediately. If you are likely to sell your home in the near future, consider whether it makes sense to pay the up-front costs of setting up a line of credit. Also keep in mind that renting your home may be prohibited under the terms of your agreement.

If you are thinking about a home equity line of credit, you might also want to consider a traditional second mortgage loan. A second mortgage provides you with a fixed amount of money repayable over a fixed period. In most cases the payment schedule calls for equal payments that will pay off the entire loan within the loan period. You might consider a second mortgage instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at both the APR and other charges. Do not, however, simply compare the APRs, because the APRs on the two types of loans are figured differently:

• The APR for a traditional second mortgage loan takes into account the interest rate charged plus points and other finance charges.
• The APR for a home equity line of credit is based on the periodic interest rate alone. It does not include points or other charges.

The federal Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. And in general, neither the lender nor anyone else may charge a fee until after you have received this information. You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term (other than a variable-rate feature) changes before the plan is opened, the lender must return all fees if you decide not to enter into the plan because of the change.

When you open a home equity line, the transaction puts your home at risk. If the home involved is your principal dwelling, the Truth in Lending Act gives you 3 days from the day the account was opened to cancel the credit line. This right allows you to change your mind for any reason. You simply inform the lender in writing within the 3-day period. The lender must then cancel its security interest in your home and return all fees including any application and appraisal fees-paid to open the account.

Annual Membership or maintenance fee. An annual charge for having the line of credit available. Charged regardless of whether or not the line is used.
Annual percentage rate (APR). The cost of credit on a yearly basis expressed as a percentage.
Application fee. Fees that are paid upon application. May include charges for property appraisal and a credit report.
Balloon payment. A lump-sum payment that may be required when the plan ends.
Cap. A limit on how much the variable-interest rate may increase during the life of the plan.
Closing Costs. Fees paid at closing, including attorneys’ fees, fees for preparing and filing a mortgage, fees for title search, taxes, and insurance.
Credit limit. The maximum amount that may be borrowed under the home equity plan.
Equity. The difference between the fair market value (appraised value) of the home and the outstanding mortgage balance.
Index. Published rate that serves as a base for the interest rate charged on a home equity line and also as the base for rate changes used by the lender.
Interest rate. The periodic charge, expressed as a percentage, for use of credit.
Margin. The number of percentage points the lender adds to the index rate to determine the annual percentage rate.
Minimum payment. The minimum amount that you must pay (usually monthly) on your account. Under some plans, the minimum payment may cover interest only; under others, it may include both principal and interest.
Points. One point is equal to one percent of the amount of the credit line. Points must usually be paid at closing and are in addition to monthly interest.
Security interest. An interest that a lender takes in the borrower’s property to ensure repayment of a debt.
Transaction fee. A fee charged each time you draw on your credit line.
Variable rate. An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

The following federal agencies are responsible for enforcing the federal Truth in Lending Act, the law that governs disclosure of terms for home equity lines of credit.
Questions concerning compliance with the act by a particular financial institution should be directed to the institution’s enforcement agency.

State Chartered Credit Unions
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue NW
Washington, DC 20580
Phone: (877) 382-4357
Web: www.ftc.gov

Federal Credit Unions
National Credit Union Administration
Office of Congressional Affairs
1775 Duke Street
Alexandria, VA 22314
Phone: (703) 518-6330
Web: www.ncua.gov

Basic Features
Fixed annual percentage rate
Variable annual percentage rate
Index used and current value
Amount of margin
Frequency of rate adjustments
Amount/length of discount (if any)
Interest rate cap and floor

Length of plan
Draw period
Repayment period

Initial fees
Appraisal fee
Application fee
Up-front charges, including points
Closing costs

During the draw period
Interest and principal payments
Interest only payments
Fully amortizing payments

When the draw period ends
Balloon payment?
Renewal available?
Refinancing of balance by lender?