By Erik J. Martin
CTW Features
If you’re a homeowner who survived the real estate market downturn from a few years back, chances are the value of your home – and your equity in it – has increased. And therein lies an opportunity: the chance to tap into that equity in the form of a home equity line of credit (HELOC), which can be a great way to finance a home improvement project, pay down debt, help pay for college, or even purchase a car.
This option has proved to be increasingly popular in recent years – in fact, for 17 consecutive quarters spanning 2012 through mid-2016, residential HELOC originations increased, according to ATTOM Data Solutions.
“Over the past four years of this housing recovery, homeowners have steadily regained equity and confidence in the housing market, resulting in a steady climb in HELOCs. That steady climb culminated with HELOC originations reaching an eight-year high in the second quarter of last year – the highest level since third quarter 2008,” says Daren Blomquist, senior vice president of ATTOM Data Solutions in Irvine, Calif. “HELOCs pulled back a bit in third quarter 2016, but we expect them to continue their upward trend in 2017 barring any big jump in interest rates.”
A HELOC is essentially a form of revolving credit for which your property serves as collateral. You can get approved by a HELOC lender for a particular amount of credit based on your ability to repay the loan; this amount is typically calculated by taking a percentage of your residence’s appraised value and subtracting from it the balance due on your existing mortgage. Unlike a loan that’s distributed in a single lump sum, you’re allowed to draw from your approved funds (via checks or a special credit card) whenever you like within the first 5 to 10 years. When you draw money, you simply make at least a minimum monthly payment, which usually is payment on the interest only; nothing is charged when no money is drawn. Once the draw period ends, a 10- to 20-year repayment period begins, during which time you can’t make any further withdrawals from the line.
HELOCs have adjustable interest rates that can vary over the life of the loan, but many can be converted or refinanced into fixed-rate loans before the draw period ends. While a HELOC’s variable rate can be higher than that for a conventional fixed-rate loan, it’s often much lower than you’d pay on a typical credit card; plus, the interest you pay is usually tax deductible.
“A HELOC is a great way to have an emergency fund in place. They’re ideal for people with equity in their home who have a need to access it,” says Sam Mischner, head of mortgages and sales for LendingTree in Charlotte, N.C., who attributes the rise in HELOC popularity in recent years to rising home values, increasing interest rates and a significant number of consumers with low interest rates on their first mortgages.
Clay Selland, president of Danville, Calif.-based Signet Mortgage Corporation, says opting for a HELOC can be a smarter choice than refinancing or pursuing a cash-out refi, especially if your goal is to pay off mounting bills or fund a renovation or big-ticket purchase.
“I’m not a big fan of rolling consumer debt into a home loan by refinancing every few years. Refinancing into a new 15 or 30 years fixed first loan sounds attractive, but without the discipline of making additional monthly payments toward principal, a client is then financing short-term debt like credit cards or car payments over 30 years – a pattern that can negatively impact the wealth generated by homeownership,” Selland says. “A HELOC provides a middle ground solution.”
Blomquist expects that HELOC originations will continue to increase for the foreseeable future.
“The fundamentals of the market, low housing inventory, slow housing starts, and growing household formation should keep home values rising for at least the next 18 months,” he says. “But don’t just take out a HELOC simply because you have the equity – use it for a specific need that may require a large amount of cash and that’s going to improve the equity in your home. And certainly don’t leverage a HELOC to live beyond your means.”
Additionally, shop around for HELOC lenders carefully.
“Find a professional mortgage lender who is knowledgeable about the benefits and risks of various HELOC options in the market,” says R. Patrick Lamb, president of Homeowners Financial Group in Scottsdale, Ariz. “Being well educated is the most important thing to avoid taking out a loan that’s not in your personal best interest.”
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