As home prices rise, home equity increases and your clients may be considering whether or not to unlock some of those increases by applying for a home equity line of credit or HELOC.
Just like a credit card, HELOCs have credit limits based upon home equity and borrower can spend up to that limit
One in four homeowners with mortgages are now considered to be “equity rich,” according to Attom Data Solutions. “Equity rich” translates into having an outstanding mortgage balance worth less than 50% of their home value. Let’s say that your client’s mortgage balance is $200,000 and that her home’s value is $500,000, your client is equity rich by $300,000.
Daren Blomquist, chief economist with Attom Data Solutions has said, “It’s a good time to leverage (home equity.)” Others agree…so much so that TransUnion, a credit reporting agency, anticipates that some 1.6M home equity lines of credit (HELOCs) will be originated in 2018, double the number of HELOC originations in 2013.
If you and/or your clients are among that 1 in 4 considering applying for a HELOC, here is a 5-point list of things to know prior to sending in that application:
- It’s a bit easier to qualify for a HELOC these days. 10% of large banks have eased their credit standards for HELOCs in Q1 2018. Lenders still want to know the borrower has the credit and the income to repay the loan. Lenders also want to see a minimum credit score of 700 and a total debt amount of less than 43% of one’s typical income.
- The 2017 tax bill changed tax rules for HELOCs
- Now, home equity interest is only tax-deductible if money from the HELOC is used for home renovation on the property tied to the loan.
- The total HELOC and mortgage balance (including the mortgage) that qualifies for a deduction cannot total more than $750,000.
- Shop for a HELOC just as you shop for a mortgage.
- Get quotes from your current lender, a credit union and an online lender so you can negotiate the best deal for yourself.
- Variables include pricing, interest rates, accessibility and terms.
- Likely, there is a 10-year draw period for you to utilize your loan. Only pay interest on the money you use.
- Likely, there is a 10-year repayment plan. Some plans have variable-rate loans. Ask.
- There are risks, real risks, associated with HELOCs.
- If you can’t make the payments on the loan, the lender can foreclose on the property.
- If you have a variable-loan repayment plan, pay off the principle on the loan before the rate resets.
- Know that the more equity you have in your home, the more protected you are if/when the market fluctuates and home values drop.
- HELOCs are NOT the only game in town with which to access your home equity,
- Home equity loans, aka second mortgages, allow borrowers to take out a one-time loan based upon their equity in the home at a fixed rate. The rate may be a little higher but the rate is fixed.
A cash-out refinance is a way to refinance your mortgage for more than you owe and you take the difference in cash. Let’s say your client bought her $250,000 home with a fixed interest rate of 7.5%. Now she owes $80,000 on that home and a fixed interest rate currently stands at 4.6%. She could cash out the difference between the home value and what she owes at a lo