Let's Talk about HELOCs
Yes, let's talk about HELOCs more than you talked about them in high school or college, which is to say, let's talk about them at all. I'm sure we've all done a lot with our knowledge of the pythagorean theorem since tenth grade, but now is probably a good time to learn about a widely available financial instrument that lets you leverage your house for money.
First things first, what is a HELOC? HELOC stands for Home Equity Line Of Credit. Great, but what does that mean? It means a Home Equity Line of Credit. Duh. I don't know about you guys, but I could read Home Equity Line of Credit, and know what every word means and still not know what it can do for me or why I would care about it, so let's start there.
What is it? Basically, it allows you to access up to 85% of the equity your home has accrued (less the mortgage balance) without selling it. Also, frequently called a second mortgage. The advantage of tapping into a HELOC is that you maintain your asset (home) while accessing money at a fairly low interest rate which you can use for many, many other things.
Why do I care? So, for us and the majority of our clients, the HELOC was interesting as an investment tool. We had purchased a one-bedroom condo in the fall of 2013, and then proceeded to watch the rental availability plummet while the real estate prices continued to skyrocket. This said two things to us by February of 2015: 1.) based off supply and demand, our place was likely worth significantly more than when we bought it and 2.) if we could purchase a second place, we could charge rents that would cover our mortgage and then some. Seemed like the right time to buy, but we definitely didn't have the cash on hand. And at that time, James was like, "we could use a HELOC to do this" which then translated to my brain as "we could risk our home and future to buy a second property of which we have limited information on. Hmmm."
Which brings us to our final point, is it risky?? Time and again, we see a bit of a gender divide on who will pursue a HELOC and who will not, and that was definitely true for us. Having no initial context for a HELOC, it seemed too good to be true. It also seemed like our financial future could be destroyed if we missed a payment.
NerdWallet advises against getting a HELOC if you are in any of the following situations:
1.) your income is not guaranteed;
2.) you can't afford some of the upfront costs (similar to a first mortgage);
3.) you don't need to borrow that much money;
4.) you are only comfortable with a fixed rate; and
5.) you are using it for basic needs, aka, you're broke and likely won't have the resources to pay it back.
If you do not find yourself having those limitations, it creates investment opportunities that are otherwise hard to access. We've accrued two additional places now by leveraging our HELOC and have had other people pay our rents for two years now. This is something that would have taken much longer to realize off of a savings, and something we encourage our rental-curious clients to pursue.
In our opinion, if you have a studio or one-bedroom in Denver at the moment, you should hold onto it for as long as you can. Given that a lot of our clients want to leave their neighborhood or upgrade or move in with a partner, HELOCs really provide an opportunity to hold and leverage that asset, while still moving onto your next place.
Questions? Curious? Rental-curious? We love talking about this stuff and we also know great lenders, so feel free to reach out to either of us.