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Minneapolis Mortgages & Finance - Home Equity
Minneapolis Home Equity
Home Equity Credit Lines
Using a credit line to borrow against the
equity in your home has become a popular source of consumer credit. And
lenders are offering these home equity credit lines in a variety of
Is a home equity credit line for you?
If you need to borrow money, home equity lines may be one useful
source of credit. Initially at least, they may provide you with large
amounts of cash at relatively low interest rates. And they may provide
you with certain tax advantages unavailable with other kinds of loans.
(Check with your tax adviser for details.)
How much money can you borrow on a home equity credit line?
Depending on your creditworthiness (your income, credit rating,
etc.) and the amount of your outstanding debt, home equity lenders may
let you borrow up to 85% of the appraised value of your home minus the
amount you still owe on your first mortgage. Ask the lender about the
length of the home equity loan, whether there is a minimum withdrawal
requirement when you open your account, and whether there are minimum
or maximum withdrawal requirements after your account is opened.
Inquire how you gain access to your credit line -- with checks, credit
cards, or both.
What is the interest rate on the home equity loan?
Interest rates for loans differ, so it pays to check with several
lenders for the lowest rate. Compare the annual percentage rate (APR),
which indicates the cost of credit on a yearly basis. Be aware that the
advertised APR for home equity credit lines is based on interest alone.
For a true comparison of credit costs, compare other charges, such as
points and closing costs, which will add to the cost of your home
equity loan. This is especially important if you are comparing a home
equity credit line with a traditional installment (or second) mortgage,
where the APR includes the total credit costs for the loan.
What are the upfront closing costs?
When you take out a home equity line of credit, you pay for many of the same expenses as when you financed your original mortgage. These include items such as an application fee, title search, appraisal, attorneys' fees, and points (a percentage of the amount you borrow). These expenses can add substantially to the cost of your loan, especially if you ultimately borrow little from your credit line. You may want to negotiate with lenders to see if they will pay for some of these expenses.
What are the continuing costs?
In addition to upfront closing costs, some lenders require you to pay continuing fees throughout the life of the loan. These may include an annual membership or participation fee, which is due whether or not you use the account, and/or a transaction fee, which is charged each time you borrow money. These fees add to the overall cost of the loan.
What are the repayment terms during the loan?
As you pay back the loan, your payments may change if your credit line has a variable interest rate, even if you do not borrow more money from your account. Find out how often and how much your payments can change. You also will want to know whether you are paying back both principal and interest, or interest only. Even if you are paying back some principal, ask whether your monthly payments will cover the full amount borrowed or whether you will owe an additional payment of principal at the end of the loan. In addition, you may want to ask about penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment.
What are the repayment terms at the end of the loan?
Ask whether you might owe a large payment at the end of your loan term. If so, and you are not sure you will be able to afford the balloon payment, you may want to renegotiate your repayment terms. When you take out the loan, ask about the conditions for renewal of the plan or for refinancing the unpaid balance. Consider asking the lender to agree ahead of time and in writing to refinance any end-of-loan balance or extend your repayment time, if necessary.
What safeguards are built into the loan?
One of the best protections you have is the Federal Truth in Lending
Act, which requires lenders to inform you about the terms and costs of
the plan at the time you are given an application. Lenders must
disclose the APR and payment terms and must inform you of charges to
open or use the account, such as an appraisal, a credit report, or
attorneys' fees. Lenders also must tell you about any variable-rate
feature and give you a brochure describing the general features of home
For More Information
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