t’s a narrative I’ve heard far too often in my profession, and it’s becoming more widespread daily. Jane* and Peter* had managed to accrue over $80,000 in credit card and personal loan debt over the past few years. It started with a simple renovation project that was more costly and more time-consuming than expected. They were now drowning under the excessive weight of debt with interest rates that hovered close to 30%. Simply put, the monthly payments were choking them.
Their home, a beautiful colonial in Ulster County that they had purchased years ago, had appreciated substantially in value. This meant a significant portion of their wealth was tied up in home equity, which is the difference between the home’s market value and the outstanding mortgage balance. While they heard of the concept of a HELOC, they really didn’t know all that it entailed and were reluctant to consider it.
Unlike traditional loans, HELOCs allow homeowners the flexibility to borrow against their equity and draw and repay funds as needed. A HELOC is, in essence, a revolving line of credit that is a second lien on a property. A key advantage is that it doesn’t disrupt or replace the primary mortgage. This is especially beneficial for those with a low first mortgage rate as it offers a way to leverage home equity without impacting the first loan. It is potentially an invaluable tool since approximately 83% of current homeowners have a conventional mortgage rate of less than 4%. No one is looking to touch that first mortgage, which is also why home inventory is so low in the marketplace.
Yet, pursuing a HELOC can be highly beneficial for suitable candidates. The first consideration is how much someone needs to borrow. Borrowing is based on a loan-to-value (LTV) ratio. This is the difference between the amount you owe on your mortgage and your home’s appraised value. Historically, many banks would permit a combined LTV of up to 90%. So, if your home is appraised at $500,000 and you owe $400,000 on your primary mortgage, a bank might typically offer a HELOC of up to $50,000 (taking the total debt to $450,000 or 90% of the home’s value).
Jane and Peter regretted not acting sooner when HELOC rates were in the 3s. Granted, they would have enjoyed lower payments for the past sixteen months, but I explained they would be in the same place now regardless of when they took out the HELOC. This is because HELOC rates are “variable” (not fixed) and change every time the Federal Reserve acts on rates. Since March 2022, this has only gone up – with one more possible rate hike in the cards. The good news is that with the rate hikes almost over, the only direction HELOCs will go in the future is lower. Today, consolidating their high-interest debts into a HELOC could mean an interest rate of around 8.5-9%, saving them nearly fifteen thousand dollars annually.
Are you on the fence about getting a Home Equity Line of Credit? There are other factors to consider. Financial institutions often adopt a conservative stance as economies waver and uncertainties increase. Banks become cautious about issuing HELOCs, and tighten their approval criteria. They become stringent with appraisal values, which are pivotal in determining loan amounts, and they become more rigid with credit and income qualifications. If someone can benefit from a HELOC, I recommend exploring those options now before they lose their equity – not because home prices are going down, but because banks will tighten soon.
Their story, while unique in its details, reflects a familiar narrative. Homeowners often find themselves in precarious financial situations, unaware that a viable solution may lie within their current circumstances. But, as with all financial decisions, understanding the broader economic landscape and the intricacies of tools like a HELOC is essential. Always consult a professional before making significant financial moves, especially in uncertain times. Your home equity is a precious asset; ensure you leverage it effectively and responsibly.
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].
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