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Home Equity Loans & Lines

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 this 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 loan could mean the loss of your home.

What Is A Home Equity Line Of Credit? A home equity line 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-meaning the maximum amount you can borrow at any one time while you have the plan. Many lenders set the credit limit on a home equity line by taking a percentage (for example: 80%) of the appraised value of the home and subtracting the balance owed on the existing mortgage.

For example:

In determining your actual credit line, the lender also will consider your ability to repay by looking at your income, debts and other financial obligations, as well as your credit history. Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the plan may allow you to renew the credit line. But in a plan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance. Others may permit you to repay over a fixed time, for example 10 years. Once approved for the home equity plan, usually you will be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks. Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, 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 lenders also may require that you take an initial advance when you first set up the line.

What Should You Look For When Shopping For A Plan? If you decide to apply for a home equity line, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan. The disclosed APR 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 Related Plan Features: Home equity plans typically involve variable interest rates rather than fixed rates. 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. To figure the interest rate that you will pay, most lenders add a margin, such as 2 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. 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. 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 may increase, and also how low your rate may fall if interest rates drop. Some lenders may 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 may not allow you to get additional funds during any period the interest rate reaches the cap.

Costs of Establishing and Maintaining a Home Equity Line: Many of the costs in 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 refundable 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).
• Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes.

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 and closing costs would substantially increase the costs of the funds borrowed. On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for the home equity lines are generally lower than rates for other types of credit. The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion 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 any money you might 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 debt by the end of the term. Other plans may allow payments 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 entire sum when the plan ends. Regardless of the minimum payment required, you can pay more than the minimum and many lenders may give you a choice of payment options. Consumers often will 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. With a variable 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 initial payments would be $83 monthly. If the rate should rise over time to 15 percent, your payments will increase to $125 per month. Even with payments that cover interest plus some portion of the principal, there could be a similar increase in your monthly payment, unless the agreement calls for keeping payments level throughout the plan. When you sell your home, you probably will be required to pay off your home equity line in full. If you are likely to sell your house in the near future, consider whether it makes sense to pay the up-front costs of setting up an equity credit line. Also keep in mind that leasing your home may be prohibited under the terms of your home equity 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 more traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time. You might consider a traditional 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 the APR and other charges. You cannot, however, simply compare the APR for a traditional mortgage loan with the APR for a home equity line because the APRs are figured differently.

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

Disclosures From Lenders: The 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 has changed before the plan is opened (other than a variable-rate feature), the lender must return all fees if you decide not to enter into the plan because of the changed term. When you open a home equity line, the transaction puts your home at risk. For your principal dwelling the Truth in Lending Act gives you three 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 creditor in writing within the three-day period. The creditor must then cancel the security interest in your home and return all fees, including any application and appraisal fees, paid in opening the account.

Glossary of Loan Terms

• Annual membership or maintenance fee . An annual charge for having the line of credit available. It is charged regardless of whether or not you use the line.
• Annual percentage rate (APR) . The cost of credit on a yearly basis, expressed as a percentage.
• Application fee . Fees that are paid upon application. An application fee may include charges for property appraisal and a credit report.
• Balloon payment . A lump-sum payment that you may be required to make under a plan when the plan ends.
• Cap . A limit on how much the variable-interest rate can increase during the life of the plan.
• Closing costs . Fees paid at closing, including attorneys' fees, fees for preparing and filing a mortgage, for taxes, title search and insurance.
• Credit limit . The maximum amount that you can borrow under the home equity plan.
• Equity . The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.
• Index . The base for rate changes that the lender uses to decide how much the annual percentage rate will change over time.
• 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 to be charged.
• Minimum payment . The minimum amount that you must pay (usually monthly) on your account. In some plans, the minimum payment may be "interest only." In other plans, the minimum payment may include principal and interest.
• Points. A point is equal to one percent of the amount of your credit line. Points usually are collected at closing, and are in addition to monthly interest.
• Security interest . An interest that a lender takes in the borrower's property to assure 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 agencies are responsible for enforcing the federal Truth in Lending Act, the law that governs credit term disclosure for home equity lines. Questions concerning compliance with the act by a particular financial institution should be directed to the institution's enforcement agency.

State Member Banks of the Federal Reserve System
Division of Consumer and Community Affairs
Mail Stop 801
Federal Reserve Board
Washington, DC 20551
(202) 452-3946
http://www.federalreserve.gov/

Federally Insured Non-Member State-Chartered Banks
and Savings Banks
Federal Deposit Insurance Corporation
Office of Compliance and Consumer Affairs
550 17th Street, NW, Room PA-1730, 7th Floor
Washington, DC 20429
(800) 934-FDIC
(202) 942-3100
http://www.fdic.gov/

National Banks
Office of the Comptroller of the Currency
Customer Assistance Unit
1301 McKinney Street, Suite 3710
Houston, TX 77010
(800) 613-6743
http://www.occ.treas.gov/

Federally Insured Savings and Loan Institutions and
Federally Chartered Savings Banks
Office of Thrift Supervision
Consumer Programs
1700 G. Street, NW, 6th Floor
Washington, DC 20552
(800) 842-6929
(202) 906-6237
http://www.ots.treas.gov/

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

Mortgage Companies and Other Lenders
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, D.C. 20580
(877) FTC-HELP
(202) 326-3578
http://www.ftc.gov/

Home Equity Plan Checklist
Ask your lender to help fill out this checklist

MIDLAND NATIONAL BANK EZ HOME EQUITY APPLICATION DISCLOSURE

This disclosure contains important information about our Midland EZ Home Equity Line of Credit (referred to as the "Plan). You should read it carefully and print a copy for your records.

Availability of Terms: All of the terms of the Plan described herein are subject to change. If any of 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 paid to us or anyone else in connection with your application.

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.

Possible Actions: Under this Plan, we have the following rights:

• Termination and Acceleration: We can terminate the Plan and require you to pay to us the entire outstanding balance in one payment, and charge you certain fees, if any of the following happen:
  1. You commit fraud or make a material misrepresentation at any time in connection with the Plan. This can include, for example, a false statement about your income, assets, liabilities, or any other aspect of your financial condition.
  2. You do not meet the repayment terms of the Plan.
  3. Your action or inaction adversely affects the collateral for the Plan or our rights in the collateral. This can include, for example, failure to maintain required insurance, waste or destructive use of the dwelling, failure to pay taxes, death of all persons liable on the account, transfer of title or sale of the dwelling, creation of a senior lien on the dwelling without our permission, foreclosure by the holder of another lien or the use of funds or the dwelling for prohibited purposes.
• Suspension or Reduction: In addition to any other rights we may have, we can suspend additional extensions of credit or reduce your credit limit during any period in which any of the following are in effect:

1. The value of your dwelling declines significantly below the dwelling's appraised value for purposes of the Plan. This includes, for example, a decline such that the initial difference between the credit limit and the available equity is reduced by fifty percent and may include a smaller decline depending on the individual circumstances.
2. We reasonably believe that you will be unable to fulfill your payment obligations under the Plan due to a material change in your financial circumstances.
3. You are in default under any material obligation of the Plan. We consider all of your obligations to be material. Categories of material obligations include, but are not limited to, the events described above under Termination and Acceleration, obligations to pay fees and charges, obligations and limitations on the receipt of credit advances, obligations concerning maintenance or use of the dwelling or proceeds, obligations to pay and perform the terms of any other deed of trust, mortgage or lease of the dwelling, obligations to notify us and to provide documents or information to us (such as updated financial information), obligations to comply with applicable laws (such as zoning restrictions). No default will occur until we mail or deliver a notice of default to you, so you can restore your right to credit advances.
4. We are precluded by government action from imposing the annual percentage rate provided for under the Plan.
5. The priority of or security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit limit.
6. We have been notified by governmental authority that continued advances may constitute an unsafe and unsound business practice.
7. The maximum annual percentage rate under the Plan is reached.

• Change in Terms: We may make changes to the terms of the Plan if you agree to the change in writing at that time, if the change will unequivocally benefit you throughout the remainder of the Plan, or if the change is insignificant (such as changes relating to our data processing systems).
• Fees and Charges: In order to open and maintain an account, you must pay certain fees and charges.

• Late Charges: Your payment will be late if it is not received by us within ten (10) days after the "Payment Due Date" shown on your periodic statement. If your payment is late we may charge you 5.000% of the unpaid amount of the payment or $25.00, whichever is less.
• Third Party Fees: You must pay certain fees to third parties such as appraisers, credit reporting firms, and government agencies. These third party fees generally total between $75.00 and $175.00. For example, a Title Certificate fee, ranging from $75.00 to $175.00 must be paid at the time the account is opened.

Property Insurance: You must carry insurance on the property that secures the Plan.

Minimum Payment Requirements: You can obtain advances of credit during 120 months (the "Draw Period"). Your Regular Payment will be based on a percentage of your outstanding balance as shown below, or $25.00, whichever is greater. Your payments will be due monthly.

Your "Minimum Payment" will be the Regular Payment, plus any amount past due and all other charges. A change in the ANNUAL PERCENTAGE RATE can cause the balance to be repaid more quickly or more slowly. When rates decrease, less interest is due, so more of the payment repays the principal balance. When rates increase, more interest is due so less of the payment repays the principal balance. If this happens, we may adjust your payment as follows: your final payment may be increased. In any event, if your Credit Line balance falls below $25.00, you agree to pay your balance in full.

Minimum Payment Examples:

• 80% Loan-To-Value: If you made only the minimum monthly payments 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 7.00%. During that period, you make 119 monthly payments ranging from $37.16 to $200.00 and one final payment of $1,842.44.
• 90% Loan-to-Value: If you made only the minimum monthly payments 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 make 119 monthly payments ranging from $41.06 to $200.00 and one final payment of $2,039.22.

Transaction Requirements: The following transaction limitations will apply to the use of your Credit Line: Credit Line Midland EZ Home Equity Check, Telephone Request, Request by Mail and In-Person Request Limitations. There are no transaction limitations for the writing of Midland EZ Home Equity Checks, requesting an advance by telephone, requesting an advance by mail or requesting an advance in person.

Tax Deductibility: Y ou should consult a tax advisor regarding the deductibility of interest and charges for the Plan.

Variable-Rate Feature: The Plan has a variable rate feature, and the ANNUAL PERCENTAGE RATE (corresponding to the periodic rate), the amount of the final payment, and the minimum payment amount can change as a result. The ANNUAL PERCENTAGE RATE does not include costs other than interest.

The Index: The Annual Percentage Rate is based on the value of an index (referred to in this disclosure as the "Index"). The Index is the Prime Rate as published in the Wall Street Journal. Information about the Index is available or published at least weekly in the Wall Street Journal's Money Rates table. We will use the most recent Index value available to us as of the date of any annual percentage rate adjustment. If the Index is no longer available, we will choose a new Index and margin. The new Index will have an historical movement substantially similar to the original Index, and the new Index and margin will result in an annual percentage rate that is substantially similar to the rate in effect at the time the original Index becomes unavailable.

Annual Percentage Rate: To determine the Annual Percentage Rate that will apply to your line, we add a margin to the value of the Index, round that sum to the nearest 0.125%, then divide the rounded value by the number of days in a year (daily). To obtain the ANNUAL PERCENTAGE RATE we multiply the Periodic Rate by the number of days in a year (daily). This result is the ANNUAL PERCENTAGE RATE. A change in the Index rate generally will result in a change in the ANNUAL PERCENTAGE RATE. The amount that your ANNUAL PERCENTAGE RATE may change also may be affected by periodic annual percentage rate change limitations and the lifetime annual percentage rate limits, as discussed below.

Initial Annual Percentage Rate Discount: The initial Annual Percentage Rate is “discounted”. It is not based on the index and margin used for later rate adjustments. The initial rate will be in effect for twelve (12) payments (80% loan to value) or six (6) payments (90% loan to value). Please ask us for the current Index value, margin, discount and Annual Percentage Rate. After you open a credit line, rate information will be provided on periodic statements that we send you.

Frequency of Annual Percentage Rate Adjustments: Your ANNUAL PERCENTAGE RATE can change quarterly. Your ANNUAL PERCENTAGE RATE cannot increase or decrease more than 2.000 percentage points at each adjustment. However, under no circumstances will your ANNUAL PERCENTAGE RATE exceed 18.000% per annum or go below 6.000% per annum (80% loan to value) or 7.000% per annum (90% loan to value) at any time during the term of the Plan.

Maximum Rate and Payment Example:

• 80% Loan-To-Value: If you had an outstanding balance of $10,000.00, the minimum monthly payment at the maximum ANNUAL PERCENTAGE RATE of 18.000% would be $200.00. This Annual Percentage Rate could be reached at the time of the 21st payment.
• 90% Loan-To-Value: If you had an outstanding balance of $10,000.00, the minimum monthly payment at the maximum ANNUAL PERCENTAGE RATE of 18.000% would be $200.00. This Annual Percentage Rate could be reached at the time of the 18th payment.

Prepayment: You may prepay all or any amount owing under the Plan at any time without penalty.

Historical Examples: The examples below show 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 from 1994 to 2008. The Index values are from the following reference period: the last business day in January. While only one payment per year is shown, payments may have varied during each year. Different outstanding principal balances could result in different payment amounts. The tables assume that no additional credit advances were taken and that only the minimum payment was made. The tables do not necessarily indicate how the Index or your payments would change in the future.

(1) This is a margin we have used recently. Your margin may be different.
(7) This A.P.R. reflects an ANNUAL PERCENTAGE RATE reflects a discount that we have provided recently. Your plan may be discounted by a different amount.
(8) This A.P.R. reflects a 6.000percent floor.

(1) This is a margin we have used recently. Your margin may be different.
(7) This A.P.R. reflects an ANNUAL PERCENTAGE RATE reflects a discount that we have provided recently. Your plan may be discounted by a different amount.
(8) This A.P.R. reflects a 7.000 percent floor.

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