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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.

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, 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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The Lipstick Index Is Back

Sales of the cosmetic product are a bright spot in an otherwise bleak discretionary-goods environment

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Masks off, lipstick index on.

In a gloomy economy, consumers might cut back on other discretionary purchases but will keep shelling out for small luxuries such as lipstick—or so goes the theory. “When lipstick sales go up, people don’t want to buy dresses,” Leonard Lauder, then-chairman of Estée Lauder who is widely credited for coming up with the so-called “lipstick index,” told The Wall Street Journal in 2001.

L’Oréal Chief Executive Nicolas Hieronimus called this out during the company’s earnings call in October, noting that a luxury lipstick or mascara is only €30, making it an “affordable treat.” Sales at L’Oréal rose 9.1% in the third quarter compared with a year earlier despite slower sales in China due to Covid-related lockdowns. Coty, maker of CoverGirl makeup, said organic sales grew 9% over the same period.

Beauty sales have also been a rare bright spot for retailers: Target said beauty category sales grew roughly 15% in its quarter ended Oct. 29 compared with a year earlier, with Ulta Beauty shops in Target tripling their total sales volume over that period.

While Macy’s namesake stores saw comparable-store sales decline last quarter, its beauty-focused Bluemercury chain saw same-store sales grow 14% last quarter compared with a year earlier. Kohl’s locations with Sephora are outperforming the rest of the department-store chain.

Of the 14 discretionary categories that market research firm NPD Group tracks, prestige beauty—products you might find at a department store or a Sephora—is the only category that is seeing unit sales growth year to date. And lipstick, which suffered during the masked-up pandemic, is making up for lost time.

Lipstick sales have grown 37% through October this year compared with a year earlier, according to Larissa Jensen, beauty industry analyst at NPD Group. That is an acceleration from the 31% growth seen during the same period last year. Lip product is the only major category within prestige beauty where sales are actually up compared with pre-pandemic levels, according to Ms. Jensen.

Cosmetic companies have also called out strong sales in fragrances, calling it the “fragrance index.” Demand has been so robust that there is an industrywide fragrance component shortage, Coty said in a press release announcing third-quarter earnings earlier this month. CEO Sue Nabi said during the call that Coty hasn’t seen any kind of trade-down or slowdown, also noting that consumers are shifting away from gifting perfume to buying it for themselves.

“A big piece of it is just a shift in what wellness means to consumers,” NPD Group’s Ms. Jensen said. “Beauty is one of the few industries that are positioned to meet [consumers’] emotional need. It makes them feel good.”

While the lipstick effect could be observed in the recession in the early 2000s, that wasn’t the case during the 2007-09 recession, during which lipstick sales declined alongside other discretionary purchases. Part of this might have had to do with category-specific dynamics.

There was a lot of newness in the cosmetic industry in 2001, including lip gloss, a relatively nascent category back then. That tailwind simply wasn’t there starting in 2008, though nail polish turned out to be consumers’ small indulgence of choice in that period. This time around, consumers may be eager to show off a part of their face that was hidden behind a mask for so long during the pandemic.

In an otherwise bleak environment for companies selling discretionary goods, those in the business of selling cosmetics look well poised to come out of the holiday season looking freshened up.

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