If you have a friend in the mortgage business, ask them what they worked on today, and chances are they will tell you that they helped a client get a home equity loan.
In the last couple of years, as home prices and home values have risen, the number of owners applying for equity loans has climbed significantly — and it looks like that trend isn’t over just yet. Home equity levels increased yet again in May, with the average owner having access to $208,000.
Here at JFB, we are not mortgage brokers, and by no means are we experts. But we know a number of people on that side of the real estate business, and we leaned on their knowledge to help you determine when a home equity or a home equity line of credit might be right for you.
Home equity can be a smart option to consider if you’re a homeowner who needs to borrow money at an affordable rate, whether it’s to make necessary home renovations or repairs, consolidate debt, or cover another large expense. And, there are multiple ways to borrow against your home equity, including loans, which let you borrow a lump sum of cash, and home equity lines of credit (HELOCs), which give you access to a line of credit that can be drawn from as necessary.
When to Consider Home Equity Loans or Credit Lines:
- Home Improvements: One of the most common reasons homeowners turn to HELOCs is to finance renovations or repairs that can increase the value of their property. Investing in your home’s infrastructure can pay off in the long run, making a HELOC a strategic move if you plan to stay in your home for the foreseeable future.
- Debt Consolidation: If you have high-interest debt, such as credit card balances or personal loans, consolidating them into a HELOC with a lower interest rate could potentially save you money on interest payments. However, this strategy requires discipline to avoid accumulating more debt and to diligently pay down the HELOC balance.
- Emergency Funds: Establishing a HELOC as a backup source of funds for emergencies can provide peace of mind. Unlike a traditional loan, you only pay interest on the amount you use, making it a cost-effective safety net for unexpected expenses like medical bills or major car repairs.
- Investment Opportunities: For financially savvy individuals, a HELOC can serve as a source of capital for investment purposes, such as purchasing additional properties or funding a business venture. However, this strategy carries inherent risks and should only be pursued by those with a solid understanding of investment principles.
When to Approach with Caution:
- Fluctuating Income: If your income is unpredictable or likely to decrease in the near future, taking on additional debt through a HELOC could strain your finances. Ensure you have a stable source of income to cover the potential repayment obligations before proceeding.
- Rising Interest Rates: HELOCs often come with variable interest rates, meaning your monthly payments could increase if interest rates rise. Assess whether you can afford potential payment fluctuations, especially if you’re already stretching your budget thin.
- Overleveraging: Using a HELOC to fund non-essential expenses or to maintain a lifestyle beyond your means can lead to overleveraging and financial hardship down the road. Be mindful of borrowing more than you can comfortably repay and prioritize needs over wants.
- Impending Life Changes: If you anticipate significant life changes, such as retirement or sending a child to college, carefully consider how a HELOC fits into your long-term financial plans. Factor in potential changes to your income and expenses to avoid being caught off guard.
In conclusion, a HELOC can be a valuable financial tool when used judiciously and in alignment with your goals and circumstances. Before pursuing a HELOC, carefully weigh the potential benefits against the risks and consider consulting with a financial advisor to ensure it aligns with your overall financial strategy.
Remember, your home is not just a roof over your head but also a significant financial asset. Treat decisions regarding its equity with the same care and consideration as you would any other investment.