Home Equity Lines Provide Easy Access to your Home’s Rising Value.
You decided to build a master suite addition to your home so you don’t have to share a bathroom with your messy kids anymore. You want a refuge from the world (and the kids).
How can you get a big chunk of cash to do that kind of remodeling? Some homeowners are turning to a home equity line of credit (HELOC). With home values rising in most areas of the country, this makes a HELOC even more attractive to homeowners who might be short on savings or other accessible money.
In fact, the median existing-home price for all housing types in June was $236,400, which is 6.5 percent above the same time last year, according to the National Association of Realtors®. This also surpasses the peak median sales price set in July 2006 ($230,400).
That leaves lucky homeowners with options to use that rising value to their advantage.
A HELOC can be used for almost anything on your wish list including paying off nagging medical bills, building your dream pool or helping your child with college costs. But remember that if you take out a home equity loan against your house and something happens, the lender can force you to sell the house to pay back your loan. A home equity loan is a secured loan with your house as the collateral. It’s not something you should do quickly or without a lot of thought or research.
Home Equity Line of Credit Rates
Home equity rates are typically variable and are tied to the prime rate.
“Home equity loans vary from bank to bank on how much they will give you. Basically, it’s a second mortgage. It’s not a bad loan for a well-qualified borrower,” says Mark McClurg, expert mortgage navigator at Envoy Mortgage in Denver. “But what worries me is that they are tied to the primary rate.”
The prime rate is currently at 3.25 percent. A HELOC is usually prime plus 1 to 2 percent more. That can adjust monthly.
“The prime has been steady for years. But we anticipate that to go up one move this year. We thought it would come in June. But the Federal Reserve have been holding off until this September or December,” he says.
He has seen where the prime has rapidly changed.
“When you talk about a ½ percent here and a ½ percent there, it can add up. It can change your payments dramatically,” he says.
HELOC Lending Limits
When you go to a lender to get a home equity loan, you will see that you can usually borrow 80-85 percent of the equity in your home, McClurg states. The actual amount you can receive also depends on your income, credit history and the market value of your home.
Here’s an example of how much you can borrow: Your house is worth $100,000. The bank says it will give 80 percent of the appraised value for a home equity loan. That means if the house was paid for already, you might be able to take out $80,000. However, you still owe $20,000 on the original loan. So, you will be able to get a home equity loan for about $60,000 if everything works out.
Some lenders go even higher with their maximum loan amounts. A credit union in the Seattle Area, BECU, will issue a HELOC of 100% of the home’s value, up to $1 million. That could mean serious home improvement.
Finding the Best HELOC Terms
The Federal Trade Commission recommends asking friends and family for the names of lenders they have used for HELOCs. Compare these lenders’ terms. Ask them to explain loan terms and conditions. A home equity loan takes points and financing charges into consideration. You will have to pay fees and closing costs, too.
By getting a home equity loan for home improvement projects, it could actually raise your home value right away and help in building back equity quickly. For instance, if you decide to take out a home equity loan to do a minor kitchen remodel, you can recoup 79.3 percent of the cost right away, according to Remodeling Magazine’s 2015 Cost Vs Value report. Just a simple entry door replacement can recoup 101.8 percent or adding a wood deck gives you 80.5 percent back.
With a HELOC, you can pull money out of it at intervals, whenever you need it.
“You can usually only draw from an equity line of credit for 10 years, and then you have to reapply. But that will vary from bank to bank,” McClurg says. “And it’s usually a 30-year loan once you do take out money from it.”
A new appraisal is usually requested for a HELOC. Some credit unions and banks will us a county assessment and an automated value model.
“Over the last several years, there is a lot of data out there to support neighborhood values. Instead of an appraisal, sometimes they will just do a drive-by appraisal and a few photos will be taken,” he says.
McClurg says to be aware of teaser rates for home equity loans.
“These are designed to make the phone ring. But sometimes they only last for 3-6 months, and then the rate rises dramatically sometimes. Make sure it is clearly defined in the paperwork what changes will happen,” he says.
Homeowners should look at all options before deciding on a home equity loan. For instance, if you need money for a new car, you might find that a dealership gives you a great interest rate.
“But to get that good interest rate, they have to make up the difference by selling the car for more,” McClurg says. “So, you can negotiate the price for cash for the car to the dealership with a home equity loan and get a great price.”
No matter what what the reason for the HELOC, homeowners are discovering they are an easier way to tap into their hard-earned home equity to complete their goals.