PUTTING YOUR HOME’S EQUITY TO WORK

Are you still dreaming of a new kitchen? Preparing to send your child off to college or down the wedding aisle? These are exciting things to look forward to, but they can also become stressful when you don’t know how you’re going to pay for such a major purchase all at once. If you have diligently built up equity in your home, you may be able to borrow cash against your home’s current value and quickly turn those dreams into reality.

Tools of the finance trade
When you’re paying a mortgage, you’re building equity — that’s the value of your home minus the amount you still owe. The longer you chop away at debt, the more equity piles up. Lenders will lend you money based on that equity (if you meet certain requirements) in two ways: a home equity loan or a home equity line of credit (HELOC). 

A home equity loan is paid back with interest at a fixed rate with fixed payments based on the length of the term, which is usually much longer than most personal loans offer, even up to 30 years. A HELOC functions much like a credit card. The interest rate is often variable (though typically much lower than other credit options), and customers are charged only for the funds that are used. 

“For most Americans, the largest asset they have is their home,” says Raf Hurt, Branch Manager for Member One. “Our home equity lines of credit or home equity loans are the best tools we have available for members to tap into that asset and receive a low rate.” 

Hurt says Member One, with branches throughout the Roanoke Valley and Central Virginia, saw an increase in applications for its home equity products last year. 

“We are still seeing a lot of interest in those products … toward renovating their homes, consolidating debt, paying for children’s education, maybe a wedding or once-in-a-lifetime vacation or starting a business. It can be anything.” 

Obtaining a home equity loan or HELOC is similar to applying for a mortgage, with a full assessment of your financial situation, credit score, income, appraisal, etc., before the loan or line of credit is official at closing. The typical amount lenders will approve is 80 percent of the value of your home (or more with institutional promotions and depending on the term of the loan) less the debt you still owe against it. For example, if your home is appraised at $200,000 and you have $100,000 left on your mortgage, 80 percent of $200,000 is $160,000, then subtract the $100,000 you owe, and you could receive a loan or credit limit of $60,000. 

Which option is best?
Courtney Glass, Senior Vice President & Senior Consumer Lender for Bank of the James, says her branches are seeing more customers apply for HELOCs, and specifically for the purpose of home renovations: bath and kitchen upgrades, finishing a basement or even in anticipation of putting the home on the market. They’re also using them for peace of mind, knowing they have a way to take care of immediate needs when they arise. 

“People just want home equity lines of credit in place for anything major that may happen. As homeowners, we all know when something goes bad, like a heat pump, that’s not cheap. And you don’t have a lot of time — you want that in as soon as possible. … Plumbing issues, too. Whatever it is, a [HELOC] is there for a safety net; I always call it that spare tire in the trunk. It’s there for you to use whenever you need it.” 

For some people, Glass says a home equity loan can be a way to consolidate credit card debt and finally see the light at the end of a long tunnel. 

People have also used HELOCs as “bridge loans” when they don’t have a mortgage on their home and want to make a down payment on a new home; the line will be paid off once they sell the old home. If you’re looking at purchasing an additional home or investment property, a HELOC can also be more attractive than a first mortgage. 

HELOCs generally come with much lower closing costs than a loan, and some banks will offer money toward those costs (Bank of the James gives a $1,000 credit, which for many people is enough to cover the full amount). 

The HELOC is also helpful if you have more than one home project in mind. Hurt says people may tackle their kitchen first and take time to pay down that balance on a HELOC and then in a year’s time start on a bath remodel and draw on the revolving credit. 

Glass says she cautions homeowners to plan ahead, because these financing options cannot be done if the project is already underway. She has had customers who have torn out a kitchen and then their funds ran dry because the price of materials went up or they decided to make a change that puts the project well above the original quote. Glass says an appraisal cannot be completed at that point (when a kitchen doesn’t function as a kitchen) and your home equity financing options are jeopardized. 

When shopping for home equity products, be sure to ask for special offers and inquire with your tax advisor because some options can potentially reduce your tax liability. Also remember that these options are still secured loans, which means the lender uses the part of your home that you own as collateral, and if you can’t pay it back, you risk going into foreclosure. 

First steps
While information on these options and even applications are available online, area lenders still open their doors to customers every day. 

“We like to invite you in for a consultation to understand what you’re trying to do so we can better advise you on what might be a better route to take,” Hurt says. 

Glass adds, “We cater to our community in that we don’t have a one-size-fits-all strategy with what products we can offer; we really base it on each borrower’s specific need. Everyone doesn’t fit in a small little box. I love it that we’re able to always speak directly with the borrower to see exactly what their short-term/long-term goals are for financing.” ✦