Balancing Risk With Bond Investing

There are of course many risks when investing in all kinds of financial instruments. Market volatility and dramatic fluctuations have become the hallmark of today’s markets. Unlike stocks, options and mutual funds however, bond risk is considerable lower and usually comes in the form of one of the following three forms:

1. Change in interest rates. Since bonds are tied to interest rates when the rate environment changes, so too can band values.
2. Defaults. This is when the person issuing the bond is unable to make interest payments to the bond holder. Bonds that have a higher risk of default usually pay higher interest rates.
3. Inflation. The purchasing  power of our money is subject to the power of increasing costs for the things we buy every day. When inflation increases, the value of bonds decreases.

Most high grade bonds are considered the least risky of investments (outside of cash) because they are usually issued and guaranteed by the United States Government or  well established and capitalized companies. This doesn’t completely eliminate risk but the usually the better the grade of debt being issued in the bond, the less a chance your money will incur significant risk.

Bond Risks

As mentioned above, all investments carry some level of risk. When you are considering bond investing however, the higher risk that is involved in a particular bond issue, the higher the expected return will be. The riskier bonds are often issued buy cities as municipal bonds or by companies with less than stellar credit records.

The less risky bonds can come in the form of Treasury Bills which are issued by the Federal Reserve or large Fortune 500 companies with very well established and clean credit ratings. Some of the risks that you will find in all bonds include:

Credit Risk: this risk comes from the possibility that the person who issued the bond will not be able to make payments and return the whole balance to you at the end of the term.

Bond Call Risk: Some bonds can be recalled by the issuer if interest rates go down during the bond issue timeframe. This is called a Bond Call and can ultimately limit and decrease your return.

Open Market Risk: If you are forced to sell the bond before it matures (reaches the end of its issue term), it may be worth less that the value printed on the bond.

Risk of Inflation: If the value of money decreases, the interest payments made to you can be less powerful, therefore decreasing your return.

Lack of Liquidity: Some bonds, should they need to be sold, may be difficult to sell on the open market. Some markets for bonds do not have many traders and getting rid of them when you need to can be tricky.

Bond investing can be a valuable part of any portfolio and for those with significant fortunes, they can provide a safe place to reliably grown your money with acceptable risk.

The Basics of Bond Investing is a post from:

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Example of How Debt Settlement Works

In our example, we will be using a fictitious person by the name of Jenny. Jenny has run up some pretty hefty balances to the tune of $50,000. This debt is spread over 5 different credit cards and the monthly minimums have now become too difficult for her to pay.

Jenny doesn’t want to have to enter bankruptcy so she looks for and finds a debt settlement program to help her pay off her debts without having to file Chapter 11. The debt settlement company that she signs on with has four goals in mind for her.

Cease all payments she is currently making to creditors. She immediately stops paying on her cards and instead opens a bank account where the minimums she can pay are deposited.

Stop taking calls from creditors. Collection calls are one of the things that cause a lot of undue stress for those who are burdened with large debts. These calls are now taken by someone at the agency she hired.

Agency starts negotiations. Once Jenny has deposited a decent amount of money into the bank account she opened, the debt settlement agency begins working with each of her creditors to arrive at an acceptable payback arrangement.

Pay new amounts/minimums. The professionals in the debt settlement program convince creditors that she can only make reduced payments and they agree to allow reductions up to 60% of what was owed.

As this process is unfolding, Jenny begins paying off her balances using the money in the checking account she has established. This allows her to continue paying any bills that become due and restore any damage that’s been done to her credit report over time.

Fees Charged By Debt Settlement Programs

One thing people fail to realize is that these programs will cost you a fee. Usually this fee can be up to 30% of the balance that you originally owed. These programs will usually work with you on a payment schedule for that as well.

Because of these fees, you really need to carefully consider these costs versus those of a bankruptcy. You may actually find that it’s easier or more beneficial to do the latter.

Positives and Negatives of Using Debt Settlement Programs

Positives

• You can avoid bankruptcy
• You can condense all of your payments into a single payment
• Stops aggressive collection practices
• By negotiating better terms, you can ultimately pay less
• Avoid having to deal with the courts and other legal actions against you

Negatives

• You credit history and score will be negatively impacted
• You may incur taxes from your settlement
• You will have accounts with the indicator “settled” on them – which are viewed poorly

As you can see, debt settlement programs can be a valuable option if you are facing a pending bankruptcy or foreclosure.  You just want to be very sure that it is the right decision for you because the consequences over time can make things worse. But, if you have the ability to make some kind of payment each month, a debt settlement program can help you reduce the amount you pay over time and get through largely unscathed.

How a Debt Settlement Program Works is a post from:

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Subprime Lending For Bad Credit Car Loans

Though there are many resources and lenders you can find to help you out with these kinds of loans, be ready for some pretty stiff terms when it comes to your rate and required money down at signing. This is because a low credit score will put you below or “sub” prime rates when it comes to their policies.

What this simply means is there is more risk when lending to you.  A credit rating in the low 600’s or less is going to put you in this category. Like any time that you need to find a loan but have credit risk in your profile, there are some steps you need to take before filling out your applications.

Check Your Credit History – Get a copy of your credit reports and make sure that your credit score is not being affected by information that is inaccurate. There may be obligations that you’ve met already that haven’t been changed in your credit reports. This can help you out tremendously. If you have issues on your reports, take steps to resolve them.

Question Dealer Financing – You certainly don’t need to use the dealer to finance bad credit car loans. They are actually incentivized to put you in high rates if you use their financing. Check around. Independent agencies can often get you better rates. And showing up with financing already taken care of leaves one less (major) thing to negotiate.

Get Competitive rates – Rates on bad credit car loans will vary depending on the institution. Some are  going to be more willing to work with you than others and if you have some ability to repay, they’re going to want to work with you so make them compete.

The main point is to not get discouraged. Credit histories and credit scores are dynamic and can be changed over time. As long as you take steps to correct past mistakes, you will likely have no problem getting bad credit car loans or financing for most other important purchases.

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Get a copy of all 3of your credit reports from the main credit bureaus. If you find errors, send them to the bureau who is reporting them – in writing. Though some of the credit bureaus will contact your creditors for you, do it yourself as well.

Step 2

If you have damaging information – especially if it’s high unpaid balances or missed payments – take a proactive approach and get those paid and current.

Step 3

If paying off these debts or getting current is a bit too overwhelming for your situation, you may want to contact professionals who can help you consolidate this debt or negotiate lower payments. Credit Counselors and Debt Relief specialists are two of the people that can help you reduce payments, often by significant amounts.

Step 4

Be wary of those who offer you loans to deal with your existing debt. What these places can do is actually put you deeper into the hole. Always double check professional associations and other due diligence.

Step 5

Focus all of your income and efforts on paying off debt. Get rid of high interest credit cards so you are no longer tempted to use them. If you have other assets which are not essential to your lifestyle, sell them to create cash to pay down balances.

Step 6

Make sure you retain or establish stability in your day to day life . This can be reflected on your credit history in form of time at residence and establishing consistent payments over time.

Step 7

Once you are in a position to obtain credit, hopefully you’ve learned the lessons of relying on them too often. You want to have credit available to you but you also want to be responsible. Most people after they go through credit difficulties, never have debt problems related to high interest balances again.

Step 8

Pay your full balance off monthly on new credit card balances.

Step 9

If you still have trouble getting credit cards, the fastest way to re-establish credit may be with secured credit cards. These are secured by a bank balance or other asset. Many companies who extend these cards will remove the secured requirement after you’ve demonstrated your ability to repay – usually in 6 months or so.

Step 10

After you’ve taken the steps to repair your credit history, get another copy of all your reports to make sure that any repairs you’ve made and damaging info has been corrected. This can usually take time since bad information can stay on your record for a while but it’s worth it to stay on top of it. Especially if you’re planning any big purchases that require good credit history.

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transfer Any mode or means by which a debtor disposes of or parts with the debtor’s property.

trustee The representative of the bankruptcy estate who exercises statutory powers, principally for the benefit of the unsecured creditors, under the general supervision of the court and the direct supervision of the U.S. trustee or bankruptcy administrator. The trustee is a private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases and some chapter 11 cases. The trustee’s responsibilities include reviewing the debtor’s  petition and schedules and bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In chapter 7, the trustee liquidates property of the estate, and makes distributions to creditors. Trustees in chapter 12 and 13 have similar duties to a chapter 7 trustee and the additional responsibilities of overseeing the debtor’s plan, receiving payments from debtors, and disbursing plan payments to creditors.

U.S. trustee An officer of the Justice Department responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors’ committees; monitoring fee applications; and performing other statutory duties. Compare, bankruptcy administrator.

undersecured claim A debt secured by property that is worth less than the full amount of the debt.

unliquidated claim A claim for which a specific value has not been determined.

unscheduled debt A debt that should have been listed by the debtor in the schedules filed with the court but was not. (Depending on the circumstances, an unscheduled debt may or may not be discharged.)

unsecured claim A claim or debt for which a creditor holds no special assurance of payment, such as a mortgage or lien; a debt for which credit was extended based solely upon the creditor’s assessment of the debtor’s future ability to pay.

voluntary transfer A transfer of a debtor’s property with the debtor’s consent.

Bankruptcy Information: Glossary of Terms (Part 4) is a post from:

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no-asset case A chapter 7 case where there are no assets available to satisfy any portion of the creditors’ unsecured claims.

nondischargeable debt A debt that cannot be eliminated in bankruptcy. Examples include a  home mortgage, debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime. Some debts, such as debts for money or property obtained by false pretenses and debts for fraud or defalcation while acting in a fiduciary capacity may be declared nondischargeable only if a creditor timely files and prevails in a non-dischargeability action.

objection to dischargeability A trustee’s or creditor’s objection to the debtor being released from personal liability for certain dischargeable debts. Common reasons

include allegations that the debt to be discharged was incurred by false pretenses or that debt arose because of the debtor’s fraud while acting as a fiduciary.

objection to exemptions A trustee’s or creditor’s objection to the debtor’s attempt to claim certain property as exempt from liquidation by the trustee to creditors.

party in interest A party who has standing to be heard by the court in a matter to be decided in the bankruptcy case. The debtor, the U.S. trustee or bankruptcy administrator, the case trustee and creditors are parties in interest for most matters.

petition preparer A business not authorized to practice law that prepares bankruptcy petitions.

plan A debtor’s detailed description of how the debtor proposes to pay creditors’ claims over a fixed period of time.

plaintiff A person or business that files a formal complaint with the court.

postpetition transfer A transfer of the debtor’s property made after the commencement of the case.

prebankruptcy planning The arrangement (or rearrangement) of a debtor’s property to allow the debtor to take maximum advantage of exemptions. (Prebankruptcy planning typically includes converting nonexempt assets into exempt assets.)

preference or preferential debt payment A debt payment made to a creditor in the 90-day

period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than the creditor would receive in the debtor’s chapter 7 case.

presumption of abuse see means test

priority The Bankruptcy Code’s statutory ranking of unsecured claims that determines the

order in which unsecured claims will be paid if there is not enough money to pay all unsecured

claims in full. For example, under the Bankruptcy Code’s priority scheme, money owed to the case trustee or for prepetition alimony and/or child support must be paid in full before any general unsecured debt (i.e. trade debt or credit card debt) is paid.

priority claim An unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. Priority refers to the order in which these unsecured claims are to be paid.

proof of claim A written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money. (There is an official form for this purpose.)

property of the estate All legal or equitable interests of the debtor in property as of the commencement of the case.

reaffirmation agreement An agreement by a chapter 7 debtor to continue paying a

dischargeable debt (such as an auto loan) after the bankruptcy, usually for the purpose of keeping collateral (i.e. the car) that would otherwise be subject to repossession.

secured creditor A creditor holding a claim against the debtor who has the right to take and hold or sell certain property of the debtor in satisfaction of some or all of the claim.

secured debt Debt backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default. Examples include home mortgages, auto loans and tax liens.

schedules Detailed lists filed by the debtor along with (or shortly after filing) the petition showing the debtor’s assets, liabilities, and other financial information. (There are official forms a debtor must use.)

small business case A special type of chapter 11 case in which there is no creditors’ committee (or the creditors’ committee is deemed inactive by the court) and in which the debtor is subject to more oversight by the U.S. trustee than other chapter 11 debtors. The Bankruptcy Code  contains certain provisions designed to reduce the time a small business debtor is in bankruptcy.

statement of financial affairs A series of questions the debtor must answer in writing

concerning sources of income, transfers of property, lawsuits by creditors, etc. (There is an official form a debtor must use.)

statement of intention A declaration made by a chapter 7 debtor concerning plans for dealing with consumer debts that are secured by property of the estate.

substantive consolidation Putting the assets and liabilities of two or more related debtors into a single pool to pay creditors. (Courts are reluctant to allow substantive consolidation since the action must not only justify the benefit that one set of creditors receives, but also the harm that other creditors suffer as a result.)

341 meeting The meeting of creditors required by section 341 of the Bankruptcy Code at which the debtor is questioned under oath by creditors, a trustee, examiner, or the U.S. trustee about his/her financial affairs. Also called creditors’meeting

Bankruptcy Information: Glossary of Terms (Part 3) is a post from:

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debtor A person who has filed a petition for relief under the Bankruptcy Code.

debtor education see credit counseling

defendant An individual (or business) against whom a lawsuit is filed.

discharge A release of a debtor from personal liability for certain dischargeable debts set forth in the Bankruptcy Code. (A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.)

dischargeable debt A debt for which the Bankruptcy Code allows the debtor’s personal liability to be eliminated.

disclosure statement A written document prepared by a chapter 11 debtor or other plan proponent designed to provide “adequate information” to creditors to enable them to evaluate the chapter 11 plan of reorganization.

equity The value of a debtor’s interest in property that remains after liens and other creditors’ interests are considered. (Example: If a house valued at $100,000 is subject to a $80,000 mortgage, there is $20,000 of equity.)

executory contract or lease Generally includes contracts or leases under which both parties to the agreement have duties remaining to be performed. (If a contract or lease is executory, a debtor may assume it or reject it.)

exemptions, exempt property Certain property owned by an individual debtor that the Bankruptcy Code or applicable state law permits the debtor to keep from unsecured creditors. For example, in some states the debtor may be able to exempt all or a portion of the equity in the debtor’s primary residence (homestead exemption), or some or all “tools of the trade” used by the debtor to make a living (i.e., auto tools for an auto mechanic or dental tools for a dentist). The availability and amount of property the debtor may exempt depends on the state the debtor lives in.

family farmer or family fisherman An individual, individual and spouse, corporation, or partnership engaged in a farming or fishing operation that meets certain debt limits and other statutory criteria for filing a petition under chapter 12.

fraudulent transfer A transfer of a debtor’s property made with intent to defraud or for which the debtor receives less than the transferred property’s value.

fresh start The characterization of a debtor’s status after bankruptcy, i.e., free of most debts. (Giving debtors a fresh start is one purpose of the Bankruptcy Code.)

insider (of an individual debtor) Any relative of the debtor or of a general partner of the debtor; partnership in which the debtor is a general partner; general partner of the debtor; or a corporation of which the debtor is a director, officer, or person in control.

insider (of a corporate debtor) A director, officer, or person in control of the debtor; a partnership in which the debtor is a general partner; a general partner of the debtor; or a relative of a general partner, director, officer, or person in control of the debtor.

joint administration A court-approved mechanism under which two or more cases can be administered together. (Assuming no conflicts of interest, these separate businesses or individuals can pool their resources, hire the same professionals, etc.)

joint petition One bankruptcy petition filed by a husband and wife together.

lien The right to take and hold or sell the property of a debtor as security or payment for a debt or duty.

liquidation A sale of a debtor’s property with the proceeds to be used for the benefit of creditors.

liquidated claim A creditor’s claim for a fixed amount of money.

means test Section 707(b)(2) of the Bankruptcy Code applies a “means test” to determine whether an individual debtor’s chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor’s aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses is more than (i) $10,950, or (ii) 25% of the debtor’s nonpriority unsecured debt, as long as that amount is at least $6,575. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.

motion to lift the automatic stay A request by a creditor to allow the creditor to take action against the debtor or the debtor’s property that would otherwise be prohibited by the automatic stay.

Bankruptcy Information: Glossary of Terms (Part 2) is a post from:

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http://www.uscourts.gov/bankruptcycourts/bankbasics.pdf

Most debtors who file a bankruptcy petition, and many of their creditors, know very little about the bankruptcy process. Bankruptcy Basics is designed to provide debtors, creditors, judiciary employees, and the general public with a basic explanation of bankruptcy and how it works. This glossary of bankruptcy terminology explains, in layman’s terms, many of the legal terms that are used in cases filed under the Bankruptcy Code.

adversary proceeding A lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the court. A nonexclusive list of adversary proceedings is set forth in Fed. R. Bankr. P. 7001.

assume An agreement to continue performing duties under a contract or lease.

automatic stay An injunction that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.

bankruptcy A legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of title 11 of the United States Code (the Bankruptcy Code).

bankruptcy administrator An officer of the judiciary serving in the judicial districts of Alabama and North Carolina who, like the U.S. trustee, is responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors’ committees; monitoring fee applications; and performing other statutory duties. Compare U.S. trustee.

Bankruptcy Code The informal name for title 11 of the United States Code (11 U.S.C. §§ 101-1330), the federal bankruptcy law.

bankruptcy court The bankruptcy judges in regular active service in each federal judicial district; a unit of the district court.

bankruptcy estate All legal or equitable interests of the debtor in property at the time of the bankruptcy filing. (The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.)

bankruptcy judge A judicial officer of the United States district court who is the court official with decision-making power over federal bankruptcy cases.

bankruptcy petition The document filed by the debtor (in a voluntary case) or by creditors (in an involuntary case) by which opens the bankruptcy case. (There are official forms for bankruptcy petitions.)

chapter 7 The chapter of the Bankruptcy Code providing for “liquidation” (i.e., the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors).

chapter 9 The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts).

chapter 11 The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.)

chapter 12 The chapter of the Bankruptcy Code providing for adjustment of debts of a “family farmer,” or a “family fisherman” as those terms are defined in the Bankruptcy Code.

chapter 13 The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.)

chapter 15 The chapter of the Bankruptcy Code dealing with cases of cross-border insolvency.

claim A creditor’s assertion of a right to payment from the debtor or the debtor’s property.

confirmation Bankruptcy judges’s approval of a plan of reorganization or liquidation in chapter 11, or payment plan in chapter 12 or 13.

consumer debtor A debtor whose debts are primarily consumer debts.

consumer debts Debts incurred for personal, as opposed to business, needs.

contested matter Those matters, other than objections to claims, that are disputed but are not within the definition of adversary proceeding contained in Rule 7001.

contingent claim A claim that may be owed by the debtor under certain circumstances, e.g., where the debtor is a cosigner on another person’s loan and that person fails to pay.

Creditor One to whom the debtor owes money or who claims to be owed money by the debtor.

credit counseling Generally refers to two events in individual bankruptcy cases: (1) the “individual or group briefing” from a nonprofit budget and credit counseling agency that individual debtors must attend prior to filing under any chapter of the Bankruptcy Code; and (2) the “instructional course in personal financial management” in chapters 7 and 13 that an individual debtor must complete before a discharge is entered. There are exceptions to both requirements for certain categories of debtors, exigent circumstances, or if the U.S. trustee or bankruptcy administrator have determined that there are insufficient approved credit counseling  agencies available to provide the necessary counseling.

creditors’ meeting see 341 meeting

current monthly income The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and income from the debtor’s spouse if the petition is a joint petition, but not including social security income and certain other payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A).

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Step 1 – Obtain Your Credit Reports

You will want to get copies from all three credit bureaus – Experian, TransUnion and Equifax. All U.S. citizens are allowed one free copy per year of their credit reports so that they can monitor credit information that is used to evaluate creditworthiness.

Step 2 – Review Your Credit History For Incorrect Information

Once you have your credit reports there are several things you should look for that are often reported incorrectly. These things include:

• Incorrect names or addresses in your file
• Inaccurate account balances
• Past Due payments that were made on time
• Accounts that do not belong to you
• Accounts that were closed without problems that still appear open
• Applications for credit that were not submitted by you
• Fraudulent accounts

It is important to remember that you should fix any problem that you see on your reports, regardless of how small they may seem.

Step 3 – Dispute Credit Report Errors

If you do find that your credit report contains inaccurate information, you should notify the credit bureau that issued the report both by calling them and submitting your dispute in writing. You also want to gather any information that supports your dispute such as statements, letters, checks or other documents. You may also want to include a copy of the credit report with your mailed submission and point out the information you are disputing.

Below are the addresses for submitting credit report information disputes:

TransUnion
Consumer Solutions
P.O. Box 2000
Chester, PA 19022-2000

Equifax
P.O. Box 7404256
Atlanta, GA 30374-0256

Experian
Dispute Department
P.O. Box 9701
Allen, TX 75013

Step 4 – Reply To All Credit Bureau Responses

Within 30 Days, the credit agency will look into and respond to any disputed information on your credit report.  In that response will be their findings and any information they were able to obtain from the creditor. Note: your creditor is required by law to investigate your file if you dispute credit report errors.

It is crucial that you have solid supporting documentation in case your creditor tells the reporting agency that the information is correct. Be prepared for quite a bit of “back and forth” when you dispute credit report information errors. If you’re applying for a loan or credit soon, you may want to get this process started as soon as possible.

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What Is a Home Equity Credit Line?

These lines of credit are revolving credit accounts (similar to credit cards) where the value of your home serves to guarantee the amount you borrow. They are mostly used for large purchases and unexpected expenses and most home owners use them for college educations, medical costs, home repair and improvement projects.

Usually you are allowed to borrow up to 85% of the value of your home based on how much your house is worth versus how much you owe the bank.  As a quick example, if your home was worth $300,000 and you currently own $250,000, your equity would be $50,000. Since that his well below 85% of the total value, the bank will likely extend you credit for the $50,000 (depending of course on your credit history and other criteria).

Your ability to repay the loan will also be evaluated when you apply for a home equity credit line. Because of recent economic conditions, banks have become more cautious extending credit so there will likely (not always) be income requirements for a HELOC.

Home Equity Line of Credit Interest Rates

Interest rate on home equity credit lines are almost always variable rates. They are tied to what is known as the Prime Rate or Treasury Bill Rate. As this index changes based on federal monetary policy, so will the interest rate on your home equity credit line.

When calculating this rate, most lenders will give you the Prime Rate plus an additional percentage point (or fraction of a percentage) in order to make a return for lending you money. Before you secure your credit line, you should find out which index your lender uses since this can affect your payment.

Also watch out for temporary or introductory rates that may be offered. These usually cover a fixed time span after which your payments will increase.

Home Equity Credit and Home Equity Loans – The differences

Another way to obtain cash from your home equity is in the form of a home equity loan. Unlike home equity credit lines, these loans are for a fixed term and a fixed payment. Essentially, they are a “second mortgage” where your rate is guaranteed to stay constant. However, the rates on home equity loans tend to be higher.

You will also receive a home equity loan in one lump sum. You begin paying interest on it from the beginning, regardless if you use it right away. In contrast, a home equity credit line only accrues interest on the amount you borrow.

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