Minnesota home equity line of credit (HELOC)

Frequently asked HELOC questions 

• What is home equity? 

  Home equity is the percentage of your home that you own. If your home is worth $300,000, and you have $50,000 left on your mortgage, you have $250,000 in home equity.

• What are the draw and repayment periods?

  Every HELOC has two phases, the draw period and the repayment period. The draw period is when you can use the credit of your HELOC. You can borrow, repay and borrow again as many times as you need during the draw. In the repayment period, the remaining balance of a HELOC needs to be paid in full over a specific length of time.

• How do I make purchases with a HELOC?  

  Using a HELOC is easy. You can write physical checks from your HELOC or transfer funds to a checking account and use a debit card for purchases.

• Does a HELOC have closing costs?

  HELOCs typically have closing costs that can range from 2% to 5% of the credit limit. Closing costs, sometimes called origination fees, cover expenses like processing and underwriting. The exact amount varies depending on your credit score and desired credit amount.

• Do I need to have my mortgage paid off to take out a HELOC?  

  No. But you will need to have sufficient equity in your home, at least 15% to 20%. Your credit score, debt-to-income ratio, income stability, home insurance and other factors play a role in shaping equity requirements. Contact us to determine if you qualify.

• Does a HELOC have flexible payments? 

  Yes. During the draw period, you can make interest-only payments if needed or repay every purchase as fast as you like. During the repayment period, you’ll need to make payments on the interest and principal. These are often called P&I payments (principal and interest).

• What is APR?

  The annual percentage rate (APR) is the yearly cost of borrowing money, expressed as a percentage of the loan amount. It includes the interest rate and other fees associated with the loan to provide a more accurate measure of the true cost of borrowing.

• How do I use my HELOC responsibly? 

  Like all forms of credit, it’s important to make sure all purchases fit into your budget and that you have a repayment plan in place. Many people also use HELOCs for projects that improve the long-term value of an asset, such as their current home.

• How do I qualify for a HELOC? 

  Qualifying for a HELOC is like qualifying for any line of credit or loan. We’ll need to know a few stats like your credit score, how much equity you have in your home and your debt-to-income ratio (how much of your monthly income goes to debt payments) to name a few. Contact us today to talk about your HELOC qualifications.

• Can I use a HELOC for a townhouse or condo?  

  Yes. Townhomes, duplexes and condos can all qualify for a home equity line of credit.

• What are home improvements that could qualify for tax deductions?  

  For your federal tax returns (state tax returns do not qualify), your HELOC expenses need to “substantially” improve the home where the equity was borrowed. Substantial home improvements in Minneapolis and St. Paul may include:

  • Roof replacement or repair
  • Insulation updates
  • Bathroom remodels
  • Kitchen remodels
  • Finishing a basement
  • New windows
  • Solar panels
  • Energy efficient heating and cooling
  • A new room or floor

  Routine maintenance and repairs do not qualify. It’s always important to talk to a tax professional to make sure your home improvement project is eligible for deductions.

• Can a HELOC be paid off early?

  Yes. You can pay off your HELOC during the draw or repayment period without prepayment penalties.

• Can I get a HELOC for a rental property?

  Yes, although it’s a little more difficult to qualify with a rental property than a primary residence. Generally, rental property applicants need higher credit scores, lower debt-to-income ratios and proof of occupancy and rental income.

• What are the differences between a HELOC and a home equity loan (HELOAN)?

  A HELOC is a revolving line of credit that can be used throughout the draw period for large or small purchases up to the credit limit. During the draw period, you can borrow and repay your line of credit as many times as you needed. In contrast, a home equity loan is a one-time lump sum often used for a singular purchase. HELOANs require principal and interest (P&I) payments immediately. With a HELOC, borrowers can make interest-only payments if     needed during the draw period.