Your Mortgage : WHAT TO ASK WHEN TAKING OUT CREDIT LINE

If you’re thinking of taking out a credit line, here are some important questions to ask each potential lender:

* What kind of interest-rate “caps” are on the loan?

The caps limit how high the interest rate on the loan can go at each adjustment period and how high it can go over the life of the loan.

* Which index is used to make periodic rate adjustments?

Two of the most common indexes used by lenders are the prime rate index and the Treasury bill index. If changes are linked to the Treasury index, you’ll need to know which Treasury index--there are the one-month, three-month and one-year Treasury indexes, just to name a few.

* How big is the lender’s margin?

The margin covers the lender’s costs and provides it with a profit. If the index rate is 9% and the margin is two points, the interest rate on the loan will be 11%.

* What kinds of up-front costs are involved?

Some lenders charge hundreds or even thousands of dollars for points and other items, while others charge only nominal set-up fees.

* Are there monthly or annual fees?

Some lenders charge stiff fees just to keep the credit lines open, even if you haven’t borrowed a penny.

* Will I eventually face a large balloon payment?

If the answer is “yes,” see if the lender will give you an option to extend your repayment period if your loan expires and you don’t have the cash to pay it off. As an alternative, some lenders will allow you to convert the loan into a conventional second mortgage if you can’t make the balloon payment.

* Are there any restrictions on my use of the account?

Some lenders, for example, won’t let you use the accounts for any purchase of less than $500; a few limit how many transactions you can make each month.