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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Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Concern about electric vehicles’ appeal is mounting as some customers show a reluctance to switch
4 min
Auto dealers across many parts of the country say electric vehicles are becoming too hard a sell for buyers worried about the range, reliability and price of these models.
When Paul LaRochelle heard Ford Motor was coming out with an electric pickup truck, the dealer was excited about the prospects for his business.
“We thought we could build a million of them and sell them,” said LaRochelle, a vice president at Sheehy Auto Stores, which sells vehicles from a dozen brands in Virginia, Maryland and Washington, D.C.
The reality has been less positive. On Sheehy’s car lots, LaRochelle says there is a six- to 12-month supply of EVs, compared with a month of gasoline-powered vehicles.
With automakers set to release a barrage of new electric models in the coming years, concerns are mounting among auto retailers about whether the technology will have broader appeal given that many customers are still reluctant to make the switch.
Battery-powered models have been piling up on car lots, dealers say, as EV sales growth has slowed in the U.S. this year. Car companies have been offering a combination of discounts and lower interest-rate deals in an effort to juice demand. But it hasn’t been enough, because buyer reticence extends beyond the price tag, dealers say.
“I’m not hearing the consumer confidence in the technology,” said Mary Rice, dealer principal at Toyota of Greensboro in North Carolina. “People aren’t beating down the door to buy these things, and they all have a different excuse why they aren’t buying one.”
Customers cite concerns about vehicles burning through a battery charge faster in cold weather or not being able to travel as far as they expected on a single charge, dealers say. Potential buyers also worry that chargers aren’t as readily accessible as gas stations or might be broken.
Franchise dealerships fear that the push to roll out new models will inundate them with hard-to-sell vehicles. Research firm S&P Global Mobility said there are 56 EV models for sale in the U.S. this year, and the number is expected to nearly double to 100 next year.
“I start to think, you know maybe we should just all pump the brakes a little bit,” Rice said.
A group of dealers expressed their concerns about the government’s role in pushing electric vehicles in a letter last month to President Biden.
A Toyota Motor spokesman said the majority of dealers have become “increasingly more confident in their ability to sell Toyota EV products.”
At Ford, the company’s electric-vehicle sales are rising, including for its F-150 Lightning pickup, but demand isn’t evenly spread across the country, according to a spokesman.
Dealers say that after selling an EV, they sometimes hear complaints about charging and the vehicles not always meeting their advertised range. In some cases, customers seek to return them to the dealer shortly after buying them.
“We have a steady number of clients that have attempted to or flat out returned their car,” said Sheehy’s LaRochelle.
While EVs remain a small but rapidly expanding part of the new-car market, the pace of growth has slowed this year. Electric-vehicle sales increased 48% in the first 11 months, compared with a 69% jump during the same period in 2022, according to Motor Intelligence. Sales remain concentrated in a few states, with California accounting for the largest chunk, S&P Global Mobility data found.
The cooling growth has raised broader questions in the industry about whether car companies face a temporary hurdle or a longer-term demand challenge. Automakers have invested billions of dollars to bring more EV models to the market, and many analysts and car executives say they remain optimistic that sales will continue to expand.
“Although the rate of growth has slowed recently, EV demand is clearly moving in the right direction,” said General Motors Chief Executive Mary Barra on a recent conference call with analysts. A combination of more affordable model options and better charging infrastructure would help encourage more people to buy electric vehicles, she said.
There are also varying views within the dealer community about how quickly buyers will adopt the technology.In hot spots for electric-vehicle demand, such as Los Angeles, dealers say their battery-powered models are some of their top sellers. Those popular EV markets also tend to have more mature public charging networks.
Selling an electric car or truck outside of those demand centres is proving more difficult.
Longtime EV owner Carmella Roehrig thought she was ready to go full-electric and sold her backup gasoline vehicle. But after the 62-year-old North Carolina resident found herself stranded last year in a rural area of South Carolina, she changed her mind. Roehrig’s Tesla Model S got a flat tire, but none of the stores in the area carried tires for a Tesla. She ended up paying a worker at a nearby shop to drive her home.
Roehrig still has her Tesla but bought a pickup truck for long road trips.
Tesla didn’t respond to a request for comment.
“I have these conversations with people who say we’ll all be in EVs in 15 years. I say: ‘I’m not so sure. I’ve tried to do it,’” Roehrig said. “I think you need a gas backup.”
Customers who want to ditch their gas vehicle for environmental reasons are sometimes hesitant, said Mickey Anderson, president of Baxter Auto Group, which owns dealerships in Kansas, Nebraska and Colorado.
“We’re in the Colorado Springs market. If this is your sole mode of transportation, and you’re in a market in extremes of elevation and temperature, the actual range is very limited,” Anderson said. “It makes it extremely impractical.”
Dealers representing around 4,000 stores across the U.S. signed the letter in November addressed to Biden, saying the administration’s proposed auto-emissions regulations designed to promote electric-vehicle sales are unrealistic. The signatories ranged from stores owned by family businesses to publicly held giants such as AutoNation and Lithia Motors.
“Some customers are in the market for electric vehicles, and we are thrilled to sell them. But the majority of customers are simply not ready to make the change,” the letter said.
Some carmakers are pushing back EV-rollout plans. GM said in mid-October that it would delay the opening of an electric pickup plant by a year to late 2025. In response to weaker-than-expected consumer demand, Ford said in late October that it would defer $12 billion of planned spending on electric-vehicle investment.
Since September, dealers on average took more than two months to sell an EV, compared with 40 days for all vehicles, according to car-shopping website Edmunds.
While discounts have helped boost sales of some electric vehicles, they also have led to repercussions for some current owners because it reduces the value of their vehicles, dealers say.
“Most people don’t have the confidence to buy an EV and know what it will be worth in 10-15 years,” said Rice from the Toyota dealership.
It may take some time for the industry to adjust because it is still in an early stage of switching to electric vehicles, Sheehy’s LaRochelle said.
“We’re asking for this market to grow organically,” he said.
Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
