Why the time is ripe to get a HELOC (Podcast)

Paul Centopani
Paul Centopani
The Mortgage Reports Editor
November 23, 2022 - 3 min read

Leverage your home equity

Do you know what’s higher than mortgage rates right now? Home equity.

In fact, the total amount of equity hit an all-time high in 2022. That’s due to the “crazy amount” of home price appreciation over the last two years, according to mortgage expert Ivan Simental.

While high interest rates make refinancing a moot prospect for the time being, savvy borrowers are using home equity lines of credit (HELOCs) to their advantage.

Simental explained why HELOCs are on the rise and how they work on a recent episode of The Mortgage Reports Podcast. Here’s what he had to say.

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What is a HELOC?

A home equity line of credit (HELOC) is a type of second mortgage that converts your home’s value into cash.

HELOCs work like credit cards. If you access the funds in your line of credit, you pay off what you borrow and can then use the full amount all over again. Your monthly payment is calculated based on how much you take out, Simental explains.

Typically, lenders allow you to tap into 80% of your home’s equity. They want you to leave the remaining 20% as a safety net in case of a loan default. However, some banks will let you borrow up to 90% or even — in rare cases — 100% of your equity.

If your home is currently valued at $500,000 and you owe $300,000 on your mortgage, then you have $200,000 in equity. In this example, your tappable equity amount would likely be between $160,000 ($200,000 x 0.8) and $200,000.

Qualifying for a HELOC normally requires a credit score above 680, a steady income, and enough equity built to borrow against — usually anything above 20% of your home’s value.

Why HELOCs are a great option right now

Understandably, homeowners who bought or refinanced during 2020 and 2021 don’t want to mess with their rock-bottom mortgage rates. Current rates stand 2-3 times higher than during the pandemic, which makes a cash-out refinance unattractive for most borrowers.

Luckily, cash-out refinancing isn’t the only way to take advantage of your equity. A HELOC could be a much better way to tap your home’s value right now. That’s because HELOCs — and their close relative home equity loans — leave your existing mortgage in place. They won’t affect your repayment schedule or cause your ultra-low mortgage rate to go up.

“The cool thing and why these are becoming so popular is because nobody wants to touch their pandemic interest rates,” Simental said. “They’re tapping into the equity they have — whether that’s to buy another investment property or pay for college tuition, pay off debt, whatever the case is — without touching their first mortgage.”

The numbers back that up as well. In the first five months of 2021, HELOC credit limit volume (the amount lenders allowed borrowers to tap) added up to $68.6 billion, according to the Urban Institute. That total jumped to $100.8 billion over the same time period in 2022.

Additionally, getting a HELOC can be a much quicker process than a first mortgage. Although you still have to provide income documentation, bank statements, and general loan information, they might only take a handful of days to get approved, Simental states.

Advice for homeowners

HELOCs are one of the perks of owning a house and could be a great option for renovating, investing in another property or paying down other debt.

If you’re on the fence about home buying right now because market conditions feel tough, keep in mind that the sooner you become a homeowner, the sooner your equity begins to build. If missing out on the historically low interest rates of the last two years is your deterrent, you can always refinance when rates come back down.

Tapping into your home’s equity could be easier than you think. If you think a HELOC makes sense for you, reach out to your lender and start putting the money in your house to work.