What rising home values mean for HELOCS

Written by
Kirk Haverkamp
Read Time: 4 minutes

The average homeowner saw a $12,500 gain in home equity last year, providing a little more financial cushion to make paying for home renovation projects easier with a home equity line of credit, or HELOC.

“Eight years ago, the economy was struggling and home values were declining, but now homeowners have built back their equity,” says Mike Kinane, senior vice president of consumer lending produts at TD Bank in Cherry Hill, N.J.

“HELOCS are a great way to not only renovate home projects, but also to use for debt consolidation, financing a new car, wedding costs or college tuition,” Kinane says.

Home equity rose by $12,500 for the average homeowner from the third quarter of 2015 to the third quarter of 2016, according to an analysis by CoreLogic. The gains varied by geography, with California, Oregon and Washington state homeowners gaining an average of $25,000 in home equity, while Alaska, North Dakota and Connecticut had small declines.

What exactly is a HELOC?

A HELOC is a type of second mortgage against your home and is a variation of a home equity loan. But instead of giving you a lump sum of cash, a HELOC is a line of credit that you can use as you wish up to your approved credit limit.

Most lenders will let you borrow up to 80 percent of your home’s equity from the home’s total value.

Kinane gives the example of a home valued at $200,000 with a $100,000 mortgage. That leaves $100,000 in equity, but not 80 percent of that can be borrowed in a HELOC, he says.

First, 80 percent of the homes total value of $200,000 must be computed — $160,000 in this example — then the mortgage principal of $100,000 is subtracted to give a HELOC of up to $60,000. The average HELOC balance is $50,000, Kinane say

The line of credit can be used for up to 10 years, when only interest payments on the amount borrowed must be paid as adjustable-rate loans. The borrower can repay the principal during that time, but doesn’t have to.

The repayment phase then starts, lasting 10 to 20 years, to repay the loan principal. The loan switches to a fixed-rate loan, with the interest rate set at the prevailing prime rate that can adjust monthly.

Benefits of increased equity

Having $12,500 more in home equity because your home value increased that much in a year is great news. It’s not enough extra money to do major home renovations, but for many people it’s enough to home projects that they want to do.

A recent survey by LightStream found 42 percent of homeowners plan to spend $5,000 or more on home improvements in 2017, and 23 percent plan to spend $10,000 or more

Outdoor living remodeling was the top home improvement project, with 41 percent planning projects such as decks, patios or landscape improvements.

Rising home values mean the economy is robust and should give homeowners more confidence in using the equity in their homes, Kinane says.

“Rising home value certainly contributes to a consumer’s confidence in their ability to borrow,” he says.

Leaving home equity on the table

Despite that confidence, TD Bank’s Philadelphia Home Show Survey found that 75 percent of respondents said they aren’t considering a HELOC over the next year and a half. And that’s with most (74 percent) saying that their property value increased during the same time.

One reason for the reluctance could be an expected rise in mortgage rates. The Federal Reserve is expected to raise the rates it charges banks three times in 2017, which will likely eventually lead to higher rates on home loans and other types of borrowing

But higher home loan rates shouldn’t affect borrowing for HELOCs, Kinane says. During the home equity booms of 2005-06 when homeowners were regularly using their homes as piggy banks and borrowing against them for all sorts of expenses, it led to the economy failing in 2008, he says.

“We’ve kind of escaped the downturn effects, largely, from 2008 and 2009,” he says.

Homeowners have largely learned their lessons from borrowing too much equity, and need a purpose such as a home remodeling project to use the money for, Kinane says.

If home prices do drop below where the HELOC sits and home equity falls, some HELOC lenders will reduce the amount of credit available, Kinane says.

Before applying for a HELOC, it’s important to keep in mind why you’re doing it, says Ryan Wright of Do Hard Money Reviews. It should increase the value of your home, or at least increase your enjoyment of your home, Wright recommends.

“The availability of the capital does not mean using the home is the best thing to do,” he says. “You still have to be careful that the money you spend is the right money and will make your property even more valuable.”

And of course that you can afford the loan payments. Higher home equity is a good thing, but it isn’t free money.

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