More Homeowners Using Helocs as Financial Safety Net
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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.

By VERONICA DAGHER
Thu, Nov 17, 2022 8:59amGrey Clock 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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A ‘cheeky’ seat takes out the top prize at Australia’s Next Top Designers Awards

A cash prize from Kanebridge Quarterly magazine, offered for the first time this year, drew a record number of entries for the design competition

By KANEBRIDGE NEWS
Mon, Jun 17, 2024 2 min

A versatile stool with a sense of fun took out the top prize at the Australia’s Next Top Designers awards at Design Show Australia last week.

The ‘Cheeky’ stool designed by Maryam Moghadam was the unanimous winner among the judging panel, which included Kanebridge Quarterly magazine Editor in Chief, Robyn Willis, Workshopped Creative Director Olaf Sialkowski, Design Show event organiser, Andrew Vaughan and Creative Director at Flexmirror Australia, Matt Angus.

Designed as an occasional stool or side table, the Cheeky stool comes in a range of skin tones. The judges applauded its commercial applications, its flexibility to work in a range of environments, and its sense of play.

In accepting the $10,000 prize, designer Maryam Moghadam quipped she was pleased to see ‘other people find bums as funny as I do’. A finalist at last year’s awards, Moghadam will put the prize money towards bringing her product to market.

Winner Maryam Moghadam said the $10,000 prize money would be put towards developing her product further for market.

Australia’s Next Top Designers is in its fourth year, but this is the first year a cash prize has been offered. Kanebridge Quarterly magazine has put up the prize money to support the next generation of emerging industrial design talent in Australia.

Editor in Chief Robyn Willis said the cash prize offered the winner the opportunity to put the money towards whatever aspect of their business it would most benefit.

“That might be prototyping their product further, spending on marketing, or simply paying for travel or even childcare expenses to allow the designer to focus on their work and take it to the next stage,” she said. “We’re thrilled to be supporting this design program and nurturing emerging design in a very practical way.”

The Coralescence lamps from the Tide Pool series by Suzy Syme and Andrew Costa had strong commercial applications, the judges said.
The Mass lamp by Dirk Du Toit is crafted from FSC-certified oak or walnut.

Two finalists were also awarded ‘highly commended’ by the judges — Mass lamp by Dirk Du Toit and the Coralescence lights from Suzy Syme and Andrew Costa at Tide Pool Designs. The judges agreed both products were beautifully resolved from a design perspective, as well as having strong commercial applications in residential and hospitality design. 

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