Unleashing the Power of Home Equity
January 1, 2024
How Much Equity Can You Access?
In the realm of personal finance, homeowners often find themselves sitting on a hidden treasure – the equity in their home.
While a property's value tends to appreciate over time, with a few exceptions, homeowners can tap into this equity through a financial tool known as a Home Equity Line of Credit or HELOC.
A HELOC is a powerful instrument homeowners have at their disposal, yet few understand. Often thought of like a credit card attached to the equity in your home, HELOCs can be a useful way for homeowners to do a number of different things without touching the low rate on their first mortgage. This flexible and powerful financial instrument has gained popularity for the myriad benefits it offers to those who understand how to leverage it wisely, especially over the past two years when rates have more than doubled.
Understanding Home Equity Line of Credit
Before diving into the benefits, let's grasp the fundamentals of a Home Equity Line of Credit. Essentially, a HELOC is a revolving credit line secured by your home. It allows homeowners to borrow against the equity they've built up in their property. The equity is the difference between the home's market value and the outstanding mortgage balance(s).
$500,000 appraised value
$200,000 mortgage on home
$300,000 available equity
$250,000 Total available equity you could access through the HELOC
Many lenders allow you to borrower up to 90% of the home value through a HELOC.
While some lenders allow you to spend the equity with a card, like a credit card, others send you blank checks to write.
How Do You Qualify For A HELOC?
Qualifying for a HELOC is based on 4 things, credit, income, assets, and available equity.
Credit
While each lender is different, most require you to have at least a 640 credit score in order to qualify. The general rule of thumb is the better your credit is, the better rate you get. There are also some restrictions for bankruptcies and foreclosures. Most lenders require a hard credit pull in order to assess your credit worthiness.
Income
Most lenders require steady job history over the past two years that cannot exceed 50% debt-to-income ratio when combined with all your other monthly bills. You’ll need to send the lender your two most recent pay stubs and last year’s W2 if you’re not self-employed. Self-employed borrowers will need to provide two most recent years tax returns, among other things.
Assets
Assets are required in some scenarios. If you own multiple properties, or pay your homeowners insurance and property taxes yourself, asset reserves of up to six months might be required by the lender. This shows the lender you have the financial ability and responsibility to pay these things in full and on time each year. They’ll also verify you’ve paid these things on time in the past before issuing an approval.
Available Equity
How much money you can pull out of your home is based on an appraisal, or other fair market values the lender accepts from other sources. Most lenders allow you to go up to 90% loan-to-value, but this can change based on the lender’s underwriting guidelines and how well you’re qualified.
As always, an experienced mortgage loan officer can give you the best advice for what you qualify for.
Benefits of a HELOC
Flexible Access to Funds
One of the primary advantages of a HELOC is its flexibility. Unlike a traditional loan that provides a lump sum, a HELOC acts as a revolving line of credit attached to the equity in your home. This means that you have the flexibility to spend money on the line and repay the funds as needed, like a credit card. This flexibility is especially beneficial for financing ongoing projects or expenses with varying costs, such as investments and home renovations.
Keeping The Low Rate On Your First Mortgage
90% of people have an interest rate lower than 6%, and with cash out refinance rates in the mid to high 6’s, few people want to do a cash out refinance to access the equity in their home. This is where HELOCs excel. A HELOC is a second mortgage on your home, but it’s different than a regular mortgage that you borrower the whole amount of money on and repay if over a period of years. HELOCs are like credit cards for your home. You only repay what you spend, and using the line of credit doesn’t impact the low rate on your first mortgage at all.
Low-Interest Rates
24% Average credit card rate
10% Average HELOC rate
HELOCs often come with lower interest rates compared to other forms of credit, such as credit cards or personal loans. Since the line of credit is secured by the actual dwelling, your home, lenders consider it less risky, and thus offer lower interest rates. This can lead to significant cost savings for borrowers, making a HELOC an attractive option for those in need of funds for major expenses, known and unknown.
Tax Deductibility
In certain situations, the interest paid on a HELOC may be tax-deductible. While tax laws can be complex and subject to change, interest on loans used for home improvements may qualify for a deduction. It's advisable to consult with a tax professional to understand the specific implications and benefits based on your individual circumstances.
Home Improvement Financing
Many homeowners turn to HELOCs to fund home improvement projects. Whether it's renovating a kitchen, adding a new room, or enhancing the overall value of the property, a HELOC provides a cost-effective means to finance these endeavors. The ability to access funds as needed allows for better project management and budgeting.
Debt Consolidation
For those with multiple high-interest debts, a HELOC can be a powerful tool for debt consolidation. By using the credit line to pay off high-interest debts such as credit cards or personal loans, borrowers can streamline their finances and potentially save money on interest payments. This approach requires discipline and a commitment to avoiding further accumulation of debt.
Emergency Fund
A HELOC is a great rainy day fund. Because you can draw on them for 10 years, then have 20 years to pay it back, the terms of HELOCs are great for those who don’t wan to keep cash on-hand, yet want the security of knowing they can access cash in an emergency.
A HELOC can serve as a reliable source of funds in times of unexpected financial challenges. Instead of relying on high-interest credit cards or loans, homeowners can use their HELOC as an emergency fund. Having a financial safety net can provide peace of mind and help navigate through unforeseen circumstances without resorting to more expensive forms of credit.
Education Financing
Funding education expenses, whether for oneself or a family member, is a common reason homeowners opt for a HELOC. With the flexibility to borrow as needed, a HELOC allows for the gradual withdrawal of funds to cover tuition, books, and other related costs. The lower interest rates compared to some student loans make a HELOC an attractive financing option for education.
Investment Opportunities
Savvy investors may leverage a HELOC to seize investment opportunities. Whether venturing into real estate, starting a small business, or investing in the stock market, the flexibility and relatively low-interest rates of a HELOC can be advantageous. However, it's crucial to approach such endeavors with careful consideration and a well-thought-out strategy.
Conclusion
A Home Equity Line of Credit is a financial tool that empowers homeowners to unlock the potential wealth tied up in their properties. From financing home improvements to consolidating high-interest debt and seizing investment opportunities, the benefits of a HELOC are diverse and impactful. However, it's essential to approach this financial instrument with caution, understanding the associated risks and responsibilities. When used wisely, a HELOC can be a valuable asset in achieving financial goals and enhancing overall financial well-being. As with any financial decision, consulting with a financial advisor is recommended to ensure that a HELOC aligns with your unique circumstances and objectives.
___________________________
To see if you qualify for a streamline refinance, contact Bee at 855-626-1999 or apply here today!
If you’re ready to make the leap into homeownership, contact us today! Our dedicated loan experts will walk you through every step of the way ensuring you get a low rate and close quickly!
If you’re looking for a streamline refinance to lower the rate and payment, apply here today or call 855-626-1999 and speak with one of our expert loan officers in your area!
Previous Blog Posts
Bee is a leading Florida mortgage broker with over 10 Florida local offices that’s been featured heavily in the local and national news for its instant pre-approvals, low rates, fast closings, and new mobile technology. For more news and resources, click here.
