Guideline to Home Equity Lines

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. See section titled "Tax Deductibility" for an important notice.

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 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 your 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:

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.

What should you look for when shopping for a plan?
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 APRs, among lenders.

Interest rate charges and plan features
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 as 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 six 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.

Costs of establishing and maintaining a home equity line
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 1 percent of the credit limit)
• Closing costs, including fees for attorneys, title search, 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 charges would substantially increase the cost of the funds borrowed. On the other hand, because the lender's risk is lower than for 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 with 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% interest rate, your monthly payments would be $83. If the rate rises over time to 15%, 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.

Lines of credit vs. traditional second mortgage loans
If you are thinking about a home equity line of credit, you also might 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 loan 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.

Disclosures from lenders
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.

Glossary

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 1 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.

Where to go for help
The following federal agency is 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 this financial institution should be directed to the institution's enforcement agency:

Division of Consumer and Community Affairs
Mail Stop 801
Federal Reserve Board
Washington, D.C., 20551
(202) 452-3693
www.federalreserve.gov

Check List — Ask your lender to help fill out this check list.

Important Terms of Our Premier Equity Credit Line
This disclosure contains important information about a Premier Equity Line. You should read it carefully and keep a copy for your records.

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 you paid to us or anyone else in connection with your application.

Security Interest:
We will take a mortgage on your home. You could lose your home if you do not meet the obligations in your agreement with us.

Possible Actions:
We can terminate your line, require you to pay us the entire outstanding balance in one payment, and charge you certain fees if:

• You engage in fraud or material misrepresentation in connection with the plan.
• You do not meet the repayment terms of the plan.
• Your action or inaction adversely affects the collateral for the plan or our rights in the collateral.

We can refuse to make additional extensions of credit or reduce your credit limit if:

• The value of the dwelling securing the plan declines significantly below its appraised value for purposes of the plan.
• We reasonably believe you will not be able to meet the repayment requirements due to a material change in your financial circumstances.
• You are in default of a material obligation of the plan.
• Government action prevents us from imposing the annual percentage rate provided for under the plan or impairs our security interest such that the value of the interest is less than 120 percent of the credit line.
• We are notified by a regulatory agency that continued advances constitute an unsafe practice.
• The maximum annual percentage rate is reached.

The initial agreement permits us to make changes to the terms of the plan at specified times or upon the occurrence of specified events.

Minimum Payment Requirements:
You can obtain advances of credit for 10 years (the "draw period"). In Connecticut, the draw period is 9 years, 10 months. During the draw period, payments will be due monthly. Your minimum monthly payment will equal the finance charges that accrued on the outstanding balance during the preceding month. Paying this minimum payment will not reduce the principal balance that is outstanding on your line.

After the draw period ends, you will no longer be able to obtain credit advances and must repay the outstanding balance over 10 years or in Connecticut, 10 years, 2 months (the "repayment period"). During the repayment period, payments will be due monthly. Your minimum payment will be calculated each month to the amount necessary to repay the Account balance over the remaining term in substantially equal payments.

Minimum Payment Example:
If you made only the minimum monthly payments and took no other credit advances, it would take 20 years to pay off a credit advance of $10,000. For accounts with a variable initial APR, at an ANNUAL PERCENTAGE RATE of 8.4%, you would make 120 monthly payments of $70.00 (118 monthly payments of $70.00 in Connecticut), followed by 120 monthly payments of $123.99 at an ANNUAL PERCENTAGE RATE of 8.5% (in Connecticut, 122 monthly payments of $122.70). For accounts with a 2-year fixed initial APR, at an ANNUAL PERCENTAGE RATE of 8.9%, you would make 120 monthly payments of $74.17 (118 monthly payments of $74.17 in Connecticut), followed by 120 monthly payments of $126.68 at an ANNUAL PERCENTAGE RATE of 9% (in Connecticut, 122 monthly payments of $125.39). For accounts with a 3-year fixed initial APR, at an ANNUAL PERCENTAGE RATE of 9.15%, you would make 120 monthly payments of $76.25 (118 monthly payments of $76.25 in Connecticut), followed by 120 monthly payments of $128.03 at an ANNUAL PERCENTAGE RATE of 9.25% (in Connecticut, 122 monthly payments of $126.76).

Fees and Charges:
There are no annual fees or cash advance fees with a Premier Equity Line. You must carry hazard insurance on the property that secures this Account; flood insurance may also be required. In some states, you will be required to pay a mortgage/intangible tax which is based on the full amount of your credit line, even if the full amount is not advanced. These taxes range from $2 to $10 per $1,000 of your credit line amount; in New York City, the tax is $20 per $1,000. Ask us for the specific tax rate in your state. Loan servicing fees will be specified in your Account agreement.

One or all of the fees described below may be included on your Account. Your Account Executive will advise you verbally and in the final loan offer that we mail to you which of these fees, if any, will be applicable to your Account.

(1) Account Opening Fee. This fee is the payment of a nonrefundable origination fee of $475 and closing costs, which may include the cost of an appraisal, to reduce the margin used to calculate the Annual Percentage Rate for your Account. The closing costs generally range between $350 and $1,250. If you ask, we will give you an itemization of the fees you will have to pay to third parties. Ask us about the applicability of this fee and whether any state law limits apply.

(2) Rate Reduction Fee. This fee is the payment of "points" (a percentage of your initial Credit Limit) to reduce the margin used to calculate the Annual Percentage Rate for your Account. Ask us about the applicability of this fee on your intended loan type and whether any state law limits apply.

(3) Account Closure Fee. In all states except Massachusetts, North Carolina, and South Carolina, the Account Closure fee would apply if you close your Account and pay off the balance within 5 years after the date it opened. In Massachusetts, the fee would apply if you close your Account and pay off the balance within 3 years after the date it is opened. In North Carolina, the fee would apply if you close your Account and pay off the balance within 2 years after the date it is opened. If you do not agree to an Account Closure Fee feature on your Account, the margin used to calculate the Annual Percentage Rate (APR) may increase.

In all states except Massachusetts, North Carolina, and South Carolina, the fee is either equal to 6 months' advance interest calculated at the APR in effect on the date your Account is closed on the amount of your payoff balance or $500, whichever amount is greater. In Massachusetts, the fee is equal to 3 months' advance interest, calculated at the APR in effect on the date your Account is closed, on the amount of your payoff balance. In North Carolina, the fee is 2% of your payoff balance. There is no Account Closure Fee in South Carolina.

(4) The lender reserves the right to limit the maximum rate reduction available.

Minimum Draw Requirement:
Other than your credit limit, there are no limits on the number or the amount of cash advances that you can receive.

Tax Deductibility:
You should consult a tax advisor regarding the deductibility of interest and charges for your Premier Equity Line.

Variable Rate Information:
Premier Equity Line 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 highest Prime Rate as published in the "Money Rates" section of The Wall Street Journal on the last business day of the month. To determine the annual percentage rate that will apply to your Account, we add a margin to the value of the index. If you have an Account with a 2 or 3 year fixed initial APR, then we will begin adding your margin to the value of the index following the expiration of the fixed rate period, and your Account will thereafter be subject to a variable interest rate.

One of the initial annual percentage rates below will apply to your Account:

(1) Variable Initial APR. The initial APR is determined by adding a margin to the index described above.

(2) 2-Year Fixed Initial APR. The initial APR is fixed and is not based on the index and margin used for later rate adjustments. The initial rate will be in effect for the first 2 years your Account is open.

(3) 3-Year Fixed Initial APR. The initial APR is fixed and is not based on the index and margin used for later rate adjustments. The initial rate will be in effect for the first 3 years your Account is open.

Ask us for the current index value, margins, premium and annual percentage rate. After you open a Premier Equity Line, rate information will be provided on periodic statements that we send you.

Rate Changes:
The annual percentage rate can change monthly during both the draw and repayment periods unless you have an Account with a fixed initial percentage rate; in that case, the interest rate will be fixed for the first two or three years that your Account is opened but after the period specified in your loan documents, the annual percentage rate can change monthly. However, the ANNUAL PERCENTAGE RATE will not exceed the lesser of 24% or 8 percentage points above the initial rate (rounded to the next highest 1/8 of 1% during the repayment period—the exact maximum Annual Percentage Rate applicable to your Account will be specified in your Account documents), or decrease by more than 2 percentage points below the initial rate; in Wisconsin, rate "floor" not applicable to credit lines of $25,000 or less. Apart from this rate "cap" and "floor," and any fixed interest rate period that may be applicable to your Account and specified in your Account Agreement, there is no limit on the amount by which the rate can change during any one year period. Ask us for the specific rate limitations that will apply to your Account.

Lender:
Loans will be made by Irwin Union Bank and Trust Company, an Indiana banking corporation located at 1717 E. College Parkway, Suite 101, Carson City, NV 89706; this may affect the availability of funds. Loans to Rhode Island residents will be made by Irwin Union Funding.

Licenses:
Irwin Union Bank and Trust Company is an Illinois Residential Mortgage Licensee. Irwin Home Equity is a Real Estate Broker licensed by the California Department of Real Estate (Lic.# 01230182) and an Illinois Residential Mortgage Licensee. In Connecticut, Irwin Home Equity is a BROKER ONLY, NOT A LENDER. Irwin Home Equity and Irwin Union Funding are Rhode Island Licensed Lenders.

Maximum Rate and Payment Examples:
For accounts with a variable initial APR, if you had an outstanding balance of $10,000 at the beginning of the draw or repayment period, the minimum monthly payment at a maximum ANNUAL PERCENTAGE RATE of 16.4% would be $136.67 for the draw period and $170.64 at a maximum ANNUAL PERCENTAGE RATE of 16.5% for the repayment period. This annual percentage rate assumes that the index is 6.25%, a margin of 2.15% has been applied to the index and that an 8% rate cap over the sum of the index and margin applies to the plan rounded to the next highest 1/8 of 1% during the repayment period. For accounts with a 2-year fixed initial APR, if you had an outstanding balance of $10,000 at the beginning of the draw or repayment period, the minimum monthly payment at a maximum ANNUAL PERCENTAGE RATE of 16.9% would be $140.83 for the draw period and $173.80 at a maximum ANNUAL PERCENTAGE RATE of 17% for the repayment period. This annual percentage rate assumes that the initial ANNUAL PERCENTAGE RATE is 8.9% and that an 8% rate cap over the initial APR applies to the plan rounded to the next highest 1/8 of 1% during the repayment period. For accounts with a 3-year fixed initial APR, if you had an outstanding balance of $10,000 at the beginning of the draw or repayment period, the minimum monthly payment at a maximum ANNUAL PERCENTAGE RATE of 17.15% would be $142.92 for the draw period and $175.39 at a maximum ANNUAL PERCENTAGE RATE of 17.25% for the repayment period. This annual percentage rate assumes that the initial ANNUAL PERCENTAGE RATE is 9.15% and that an 8% rate cap over the initial APR applies to the plan rounded to the next highest 1/8 of 1% during the repayment period. Ask us for the specific maximum annual percentage rate that will apply to your plan. The maximum annual percentage rate could be reached during the first month of either the draw or repayment period unless you have a fixed initial interest rate and, in that case, the maximum annual percentage rate could be reached during the first month of the draw period following the expiration of the fixed rate period or during the first month of the repayment period.

Historical Example:
The following table shows how the annual percentage rate and the minimum monthly payments for a single $10,000 credit advance would have changed based on changes in the index over the past 15 years. These index values would have applied in January of each year. While only one payment amount per year is shown, payments would have varied during each year other than during any applicable fixed rate period.

The table assumes that no additional credit advances were taken, that only the minimum payments were made on the due date each month, 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.

* This is a margin we have used recently. Different margins may apply.
** This is an initial APR we have used recently. Different initial APRs may apply.
† In this example, the rate floor is 10.15% during the draw period, rounded to 10.25% during the repayment period.
†† In this example, the rate floor is 10.4% during the draw period, rounded to 10.5% during the repayment period.
§ In this example, the rate floor is 10.65% during the draw period, rounded to 10.75% during the repayment period.

Some customer calls may be monitored and/or recorded in order to ensure the highest level of customer service.

Notice of Right to Receive Copy of Appraisal:
You have a right to a copy of the appraisal report or property valuation used in connection with your application for credit. If you wish a copy, please write to Irwin Home Equity Corporation, P.O. Box 5029, San Ramon, California 94583. We must hear from you no later than 90 days after we notify you about the action taken on your credit application or you withdraw your application. In your letter, give us your name, address and your Premier Equity account number (if applicable). We require you to reimburse us for the cost of the appraisal report before a copy will be provided to you.

New York Residents: You should consult with your legal advisor and with other mortgage lien holders as to whether any prior liens contain acceleration clauses which would be activated by a junior encumbrance.