HELOC Hacks: Smart Solutions for Homeowners
Do you need to renovate your kitchen, pay off debt, or finance a major expense? A Home Equity Line of Credit (HELOC) could be your answer.
A HELOC is a loan that allows homeowners to borrow against the equity in their home as needed, making them flexible solutions to meet their financial goals.
"HELOCs are simple to apply for and draw from. The benefits include quick access to affordable money," said Amber Earnst, a Loan Officer for New American Funding in Bettendorf, IA. "Since the payments are interest-only, they are lower as well."
Even though HELOC use dropped during the pandemic, balances have bounced back, rising 2.7% from 2022 to 2023, according to the Experian 2023 Consumer Credit Review. With home values remaining strong across the country, homeowners collectively hold nearly $30 trillion in home equity, according to the St. Louis Federal Reserve.
This significant equity provides homeowners with a great opportunity to explore their financial options.
What is a HELOC?
A HELOC lets homeowners borrow money based on their equity. It works like a credit card: a credit limit is set, and money can be borrowed as needed during a draw period, usually 5-10 years, with interest paid only on what is borrowed.
After that, the repayment phase begins, typically lasting 10-20 years, where the borrowed amount and interest are paid back. HELOCs offer flexible access to money but must be managed carefully since the home is used as collateral.
One of the main advantages of a HELOC is its lower interest rates than other forms of credit, such as high-interest credit cards. For example, if you have a $10,000 balance on a credit card with a 23% interest rate, you'll pay about $2,300 in interest each year. But with a HELOC at an average 9.17% interest rate, you'll pay only $917 in interest per year.
Smart uses for a HELOC
Using a HELOC for home improvements can be a wise investment. If the upgrades are valuable, they can make your living space more enjoyable while also increasing your home's resale value.
"To maximize your home's value, it's crucial to focus on upgrades that truly enhance your property," said Ernst. This ensures the funds contribute meaningfully to your home's overall worth and appeal.
A HELOC can help those struggling with high-interest debt by consolidating debts into one lower-interest payment, reducing the interest paid, as shown in the example above.
A HELOC can also be a safety net for unexpected expenses, such as medical bills, urgent home repairs, or other life events. Life is unpredictable, and having access to emergency funds can provide peace of mind.
How to qualify for a HELOC
The amount you can borrow with a HELOC depends on the equity you have in your home. Most lenders require that you have at least 15-20% equity in your home.
A common misconception among homeowners is that they can get a HELOC for 100% of the value of their home.
While that's not an option, the average credit limit for HELOCs has risen, with many lenders allowing homeowners to borrow up to 80% to 85% of their home's value minus any outstanding mortgage balance.
A good credit score is key to qualify for a HELOC. While requirements vary by lender, a score of 620 or higher is typically needed. Lenders will also look at your income and debt levels to make sure you can afford to repay the loan. A low debt-to-income ratio can improve your chances of approval.
"Another misconception is that they think HELOCS are cumbersome and expensive, and they really aren't," said Ernst. "The one we use does an automated appraisal valuation, so no one has to go to their house, which people like."
Managing your HELOC
It's easy to be tempted to borrow more than you need, but over-borrowing can lead to financial trouble. Only borrow what you can afford to repay and use the funds for necessary expenses.
When asking Ernst what her clients usually use a HELOC for, she said, “Some are doing upgrades, and this is the source of funds. And some are buying a new home and need access to equity to purchase the new one first and sell later.”
"So many options. Financially sound decisions are based on any of the above."
Ready to explore your HELOC options? Contact New American Funding to get started today!
Amber Ernst NMLS # 406037
Dusty Lloyd NMLS # 247106