Home Equity Loans and Lines of Credit

A home equity line of credit, or HELOC, is a revolving line of credit that functions similar to a credit card. You can borrow as much as you need, any time you need it, up to a set limit. This flexibility makes HELOCs particularly useful for covering ongoing expenses, or as a source of emergency funds since you can access cash as required.

Because a HELOC is a line of credit, you make payments only on the amount you actually borrow, not the full amount available. HELOCs also may give you certain tax advantages unavailable with some kinds of loans. Talk to an accountant or tax adviser for details.

Like home equity loans, HELOCs require you to use your home as collateral for the loan. This may put your home at risk if your payment is late or you can't make your payment at all. Additionally, some HELOCs include balloon payments — a large, lump sum usually due at the end of a loan term — which may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you can’t qualify for refinancing. If you sell your home, most plans also require you to pay off your credit line at the same time.

Before you sign, it’s essential to read the loan closing papers carefully. If the loan terms don’t meet your expectations or needs, don’t sign the agreement. Instead, try negotiating changes or, if necessary, walk away. You also generally have the right to cancel the deal for any reason — and without penalty — within three days after signing the loan papers.

Federal law gives you three days to reconsider a signed credit agreement and cancel the deal without penalty. You can cancel for any reason but only if you are using your primary residence as collateral, not a vacation or second home.

Under the right to cancel, you have until midnight of the third business day to cancel the credit transaction. Day one begins after:

• you sign the credit contract;
• you get a Truth in Lending disclosure form containing key information about the credit contract, including the APR, finance charge, amount financed, and payment schedule; and
• you get two copies of a Truth in Lending notice explaining your right to cancel.

For cancellation purposes, business days include Saturdays, but not Sundays or legal public holidays. For example, if the events listed above take place on a Friday, you have until midnight on the next Tuesday to cancel.

During this waiting period, the lender may not proceed with any actions related to the contract. This means the loan funds cannot be delivered. If you’re dealing with a home improvement loan, the contractor may not deliver any materials or start work.

Canceling Home Equity Lending

If you decide to cancel the agreement, you must tell the lender in writing. You may not cancel by phone or in a face-to-face conversation with the lender. Your written notice must be mailed, filed electronically, or delivered, before midnight of the third business day. If you cancel the contract, the security interest in your home also is cancelled, and you are not liable for any amount, including the finance charge. The lender has 20 days to return all money or property you paid as part of the transaction and to release any security interest in your home.

If you received money or property from the creditor, you may keep it until the lender shows proof that your home is no longer being used as collateral and returns any money you have paid. At that point, you must offer to return the lender’s money or property. If the lender does not claim the money or property within 20 days, you may keep it.

If you have a personal financial emergency — like damage to your home from a storm or other natural disaster — you can waive your right to cancel and eliminate the three-day period. To waive your right, you must give the lender a written statement describing the emergency and stating that you are waiving your right to cancel. The statement must be dated and signed by you and anyone else who shares ownership of the home. The federal three-day cancellation rule doesn’t apply in all situations when you are using your home for collateral. Exceptions include when:

• you apply for a loan to buy or build your principal residence;
• you refinance your loan with the same lender who holds your loan and you don’t borrow additional funds; and
• a state agency is the lender for a loan.

In these situations, you may have other cancellation rights under state or local law.