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Answers to Common HELOC Questions

By Jeff Elgersma, Mortgage Loan Officer
1/13/2023
 

Answers to Your HELOC FAQs

Are you planning a home remodel or renovation project? Can’t put off your list of home repairs any longer? Or maybe you need help covering other expenses in life. A Home Equity Line of Credit (HELOC) is a flexible credit account that can be used for a variety of things. Learn more as we answer your most frequently asked questions.

Photo: Woman looking at laptop
Text: A HELOC, or Home Equity Line of Credit, carries a variable rate that may change over time.

What is a HELOC?

HELOCs are secured lines of credit that use the equity in your home as collateral. You can calculate the amount of equity you have in your house by subtracting your current mortgage balance from your home’s estimated market value. Generally, you can borrow up to 90% of your home’s value. That 10% equity cushion prevents you from getting over-leveraged or underwater on your mortgage loan(s).

For example, let’s say your home’s market value is $200,000. If you owe $125,000 on your mortgage, you would have about $75,000 in equity. With that 15% cushion of $30,000, you could borrow up to $45,000 with a HELOC or Home Equity Loan.

Because HELOCs are secured by the equity in your home, you’ll get a lower interest rate than with other types of loans such as credit cards and personal loans. However, there is some risk involved because a HELOC is a type of lien on your home. If you don’t make payments on what you borrow, your lender has the right to seize your home.


How Do HELOCs Work?

You can access funds from your HELOC at any time for any reason (up to the limit). In this way, HELOCs are like credit cards. As with a credit card, HELOCs are approved for a certain borrowing amount and you only pay interest on what you borrow.

HELOCs are even more flexible than credit cards in terms of how you can access your credit line. Transfer funds from your HELOC to your checking account to be used like cash. You can also write a check from your HELOC, which is convenient when paying contractors during a home improvement or renovation project.

The life of a HELOC can be divided into two parts:

  • A draw period (often 10 years) in which you can use your HELOC as much as you want, up the borrowing limit.
  • Any remaining balance at the end of the draw period is converted into a term loan with a fixed monthly payment amount over a predetermined term length.

Depending on the terms of your HELOC, you may be subject to a penalty fee if you close your HELOC before the end of the draw period. You may also be required to draw a certain amount within a certain period of time after opening your HELOC.

 

What Can I Use A HELOC For?

While a HELOC can be used for just about anything, here are some popular ways to use your HELOC:

  • Home Repairs
  • Home Renovations
  • College tuition
  • Medical bills or other unexpected expenses
  • Down payment on a second home
  • Down payment on an investment property
  • Consolidate higher interest debt
  • Life events such as a wedding or big vacation
  • Start a business
  • Help with cash flow


How Long Does HELOC Approval Take?

If you have one or more of these specific uses for your HELOC in mind, make sure to start the application process before you actually need the money. The total time from application to approval may take a few weeks as lenders need to check your credit score, verify your income, schedule an appraisal of your home, and go through the underwriting process. If approved, you will have a Closing for your HELOC just like you did with your original mortgage.

Photo: Couple painting
Text: A HELOC can be used for almost anything! Home improvement projects are a popular way to use a HELOC because they may add value to your home.

 

Should I Get a HELOC for Home Improvements?

The short answer is yes, using your HELOC for home improvements is one of the best ways to use it. Because HELOCs are secured by the equity in your home, and home improvements improve the value of your property (thereby increasing your equity), renovations can actually help you offset the cost of borrowing by building your overall net worth. In this way, when a HELOC is spent to improve your home, they are a form of good debt.

Prior to tax year 2018, the interest paid on a HELOC could be deducted when the loan is used to “substantially improve your home.” Under the Tax Cuts and Jobs Act, this deduction is suspended through 2025. Depending on what Congress does, HELOC interest may become tax-deductible again.

 

Can I Get a HELOC on an Unfinished House?

Banks typically have requirements for issuing mortgage and home equity loans, which usually stipulate that the property is inhabitable. This is because they want to be able to sell the home in the event of foreclosure.

However, banks will often try to work with you, and much will depend on the actual condition of the home and whether or not any progress is being made towards its completion.

Ultimately, it’s impossible to answer this question in a general sense, but for people who are genuinely interested in getting a HELOC for an unfinished house, it’s worth contacting a bank to see if they would consider it.


Photo: Couple looking at a paper
Text: A HELOC, like other lending products, can negatively impact your credit score if payments are not made on time.


How Does a HELOC Affect Your Credit?

HELOCs are often compared to credit cards, and when it comes to your credit, they are also similar. You need to have a good to excellent credit score to be approved for a HELOC. The application will trigger a credit inquiry, which can temporarily impact your score. Once you start using your HELOC, you will want to make regular and timely payments like you would for a credit card. Late payments can hurt your credit score.

HELOCs also affect your credit utilization ratio, which is the percentage of your total available credit in use at any given time. The rule of thumb for good credit utilization is to have a balance of no more than 30% of your total borrowing limit.

Finally, as with any other loan, the longer you have a HELOC open, the longer your credit history will be.

 

Can You Get a HELOC For a Mobile Home?

The short answer is yes, with a few additional qualifications:

  • You will need to own the land that your mobile home sits on.
  • Your home should be on a permanent foundation.
  • Banks often have minimum-size requirements, so your best bet is to have a double-wide mobile home.
  • Otherwise, typical requirements apply.
 
Photo: Woman using calculator while writing
Text: Know Your Equity: The amount of equity you have in your home will be used to calculate the allowable size of your HELOC. Speak with a Mortgage Lender to discuss your unique situation.

Can You Have Multiple HELOCs on the Same Property?

Yes, there’s no law or rule forbidding this. However, it’s up to the bank you are seeking a line of credit from to decide if they want to extend a second HELOC. Seeking additional credit accounts may also hurt your credit score, if it seems like you are over-leveraged or in financial trouble.

 

Contact our Mortgage Experts!

Have additional questions about HELOCs? Not sure if it’s the right type of loan for you? Contact one of our mortgage experts to learn more. You can also visit one of our locations in Northwest Iowa, Southwest Minnesota, and Southeast South Dakota. Peoples Bank is Where Values Matter! We have been proudly serving our communities since 1945. We look forward to helping you achieve your goals and dreams for home ownership.

 

Check out our recent blog post on “How to Build Savings During High Inflation.”