More Homeowners Using Helocs as Financial Safety Net
Home-equity lines of credit were up 40% in the second quarter from a year earlier. Here’s what homeowners should know before taking out Helocs.
4 min
As high interest rates drive up the cost of borrowing money, more people are tapping the equity in their homes.
Americans took out $66 billion in home-equity lines of credit, or Helocs, in the second quarter, a 40% increase from a year ago and the largest amount in almost three years, according to data from real-estate analytics firm Attom Data Solutions. These accounts, which allow homeowners to borrow against the value of their house, are making a comeback as higher rates make it less favourable to refinance a mortgage.
A Heloc works like a credit card, but since it is backed by your property generally offers a much more favourable interest rate. The average Heloc rate is 7.7%, according to Bankrate.com, compared with the average 19.04% APR on a credit card and 10.64% average personal loan rate. Owners get a credit line based on their home equity, but don’t have to use all or even any of available funds.
Financial planners say the ready access to money Helocs provide can be particularly appealing during a time of economic uncertainty—as long as borrowers refrain from treating their home as an ATM. Lenders tend to tighten credit standards during a downturn so it may be wise to apply for a Heloc now if you’re worried about needing the funds later, they said.
“Clients are saying they want a safety net as credit-card bills rise along with unemployment fears,” said Ryan Leahy, regional president and senior loan officer at HomeTown Lenders of Texas.
While Helocs can provide that financial safety net, homeowners have to understand what they are getting into. Those who fail to repay the Heloc could risk losing their home. A Heloc is different from a home-equity loan, which typically has a fixed rate and gives borrowers a lump sum upfront.
While demand for Helocs is increasing, some banks are choosing not to offer them due to the risks, said Rick Sharga, executive vice president of market intelligence at Attom. Instead, borrowers often turn to credit unions and community banks to get Helocs, he said. Big banks such as Wells Fargo and JPMorgan Chase & Co. haven’t resumed issuing new Helocs after halting them during the pandemic. A Citibank spokesman said the bank temporarily suspended Helocs, but plans to offer them again next year. Bank of America continues to offer Helocs, according to the company.
Here’s a rundown of how the accounts work and what financial advisers say are the best ways to use them.
How Helocs work
To be eligible for a Heloc, your home’s current value usually needs to be at least 15% higher than the amount you owe on the mortgage, said Kate Wood, a home and mortgage specialist at NerdWallet. Each lender may have slightly different terms and requirements, she said.
The maximum size of a Heloc is usually a fraction of homeowner’s equity. For a home valued at $400,000, with $250,000 still owed on the mortgage, a borrower might be able to get a Heloc for about $90,000, Ms. Wood said.
The interest rates on Helocs are typically variable, meaning they will fluctuate as interest raises change more broadly. Other factors go into the rate, including your credit score, debt-to-income ratio and the amount you are seeking to borrow, Ms. Wood said.
Heloc applications also come with certain fees, which vary by lender, and may include the cost of a home appraisal and title search, along with other expenses that can add up to between 2% and 5% of the total credit line, Ms. Wood said.
Interest paid on a Heloc can be tax deductible, but only if you use the Heloc to pay for home renovations and improvements, said Jacob Channel, senior economist at LendingTree.
You can only deduct interest on up to $750,000 of residential debt—this limit will take into account both how much you owe on a Heloc as well as other types of residence loans like a mortgage, he said.
Helocs for home improvements
One of the most common uses for Helocs is to fund home-improvement projects, which have the added benefit of potentially increasing your home’s value. With home prices and mortgage rates both high, many Americans are choosing to renovate rather than relocate, said Dan Butts, a mortgage banker in Charleston, S.C.
Xin Li, who lives in San Francisco, recently used a Heloc to fund a $120,000 kitchen remodel. She is debating whether to move forward with the renovation now or if she should wait to start withdrawing funds from the Heloc until home furnishing and labor prices fall.
Mr. Butts advises clients to only carry a Heloc balance for a short term, typically around 18 to 24 months, due to the product’s variable interest rate.
At the end of third quarter, the average U.S. homeowner had $196,000 in tappable equity, down 9.6% from the second quarter but still up about 10% from the same time last year, according to mortgage technology and data firm Black Knight Inc.
When Helocs may not be the best option
Jason Blumstein, a financial planner in Englewood, N.J., warns clients against taking out Helocs for large non-discretionary pure expenses such as a vacation or a wedding. These expenses, while they may provide a short-term emotional high, don’t provide a financial return the way a home improvement might, he said.
Taking out home equity to fund investments can be risky
Many people use Helocs for funds to start a business, for a down payment on another property or to put into stocks. But financial advisers warn that such investments can be risky.
In recent years, some aggressive investors would take out a Heloc balance at a low rate and invest the proceeds in anticipation of a higher return in the market. This arbitrage is no longer an optimal strategy with Heloc rates more than double what they were a year ago and increased market volatility, said Jordan Slingo, a financial planner in Athens, Ga.
Don’t use a Heloc to invest in the stock market dip, Leibel Sternbach, a financial adviser in Melville, N.Y., is telling more clients lately.
“Not only will you lose most of your profits to loan fees and interest payments but you’ll be taking on excessive risk,” he said.
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Terrible commutes. Expensive child care. Employees explain why they will keep working from home.
4 min
What’s still keeping American workers out of the office?
At a time when restaurants, planes and concert arenas are packed to the rafters, office buildings remain half full. Thinly populated cubicles and hallways are straining downtown economies and, bosses say, fragmenting corporate cultures as workers lose a sense of engagement.
Yet workers say high costs, caregiving duties, long commutes and days still scheduled full of Zooms are keeping them at home at least part of the time, along with a lingering sense that they’re able to do their jobs competently from anywhere. More than a dozen workers interviewed by The Wall Street Journal say they can’t envision returning to a five-day office routine, even if they’re missing career development or winding up on the company layoff list.
Managers say they will renew the push to get employees back into offices later this year. The share of companies planning to keep office attendance voluntary, rather than mandatory, is dropping, according to a survey released in May of more than 200 corporate real-estate executives conducted by property-services firm CBRE, one of the largest managers of U.S. office space.
A battle of wills could be ahead. The gap between what employees and bosses want remains wide, with bosses expecting in-person collaboration and workers loath to forgo flexibility, according to monthly surveys of worker sentiment maintained by Nicholas Bloom, a Stanford University economist who studies remote work.
Escalating expenses
One reason workers say they’re reluctant to return is money. Some who have lost remote-work privileges said they are spending hundreds, or in some cases thousands, of dollars each month on meals, commutes and child care.
One supercommuter who treks to her Manhattan job from her home in Philadelphia negotiated a two-day-a-week limit to her New York office time this year. Otherwise, she said she could easily spend $10,000 a year on Amtrak tickets if she commuted five days a week.
Christos Berger, a 25-year-old mortgage-loan assistant who lives outside Washington, D.C., estimates she spends $2,100 on child care and $450 on gas monthly now that she is working up to three days a week in the office.
Berger and her husband juggled parenting duties when they were fully remote. The cost of office life has her contemplating a big ask: clearance to work from home full time.
“Companies are pushing you to be available at night, be available on weekends,” she said, adding that she feels employers aren’t taking into account parents’ need for family time.
Rachel Cottam, a 31-year-old head of content for a tech company, works full time from her home near Salt Lake City, making the occasional out-of-town trip to headquarters. She used to be a high-school teacher, spending weekdays in the classroom. Back then, she and her husband spent $100 a week on child care and $70 a week on gas. Now they save that money. She even let her car insurance company know she no longer commutes and they knocked $5 a month off the bill.
Friends who have been recalled to offices tell Cottam about the added cost of coffee, lunch and beauty supplies. They also talk about the emotional cost they feel from losing work flexibility.
“For them, it feels like this great ‘future of work’ they’ve been gifted is suddenly ripped away,” she said.
Parent trade-offs
If pandemic-era flexible schedules go away, a huge number of parents will drop out of the workforce, workers say.
When Meghan Skornia, a 36-year-old urban planner and married mother of an 18-month-old son, was looking for a new job last year, she weeded out job openings with strict in-office policies. Were she given such mandates, she said, she would consider becoming an independent consultant.
The firm in Portland, Ore., where Skornia now works requests one day a week in the office, but doesn’t dictate which day. The arrangement lets her spend time with her son and juggle her job duties, she said. “If I were in the office five days a week, I wouldn’t really ever see my son, except for weekends.”
Emotional labor
For some, coming into the office means donning a mask to fit in.
Kenneth Thomas, 42, said he left his investment-firm job in the summer of 2021 when the company insisted that workers return to the office full time. Thomas, who describes himself as a 6-foot-2 Black man, said managing how he was perceived—not slipping into slang or inadvertently appearing threatening through body language—made the office workday exhausting. He said that other professionals of colour have told him they feel similarly isolated at work.
“When I was working from home, it freed up so much of my mental bandwidth,” he said. His current job, treasurer of a green-energy company, allows him to work remotely two or three days a week.
Lost productivity
The longer the commute, the less likely workers are to return to offices.
Ryan Koch, a Berkeley, Calif., resident, went to his San Francisco office two days a week as required late last year, but then he let his attendance slide, because commuting to an office felt pointless. “I’m doing the same video calls that I can be doing at home,” he said.
Koch, who works in sales, said his nonattendance wasn’t noted so long as his numbers were good. When Koch and other colleagues were unable to meet sales quotas in recent weeks, they were laid off. Ignoring the in-office requirement probably didn’t help, he said, adding he hopes to land a new hybrid role where he goes in one or two days.
Jess Goodwin, a 36-year-old media-marketing professional, turned down an offer to go from freelance to full time earlier this year because the role required office time and no change in pay.
Goodwin said a manager “made it really clear that this is what they’re mandating right now and it could change in the future to ‘you have to be back in five days a week.’”
Goodwin, who lives in Brooklyn, N.Y., calculated that subway commutes to Midtown Manhattan would consume more than 150 hours annually, in addition to time spent getting ready for work.
Goodwin’s holding out for a better offer. She said she would consider a hybrid position if it came with a generous package and good commute, adding: “And I would also probably need something in my contract being like, ‘We’re not going to increase the number of days you have to come in.’”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
