HELOC 2021: What your borrowers need to know
Ten years ago, HELOCs were commonplace in the industry and were regularly offered to borrowers, but that has changed. Many borrowers today are unfamiliar with them and unaware of the benefits they offer.
HELOCs can do it all, from home improvement to debt consolidation, giving your borrowers increased purchasing power, or even just offering peace of mind. There has never been a better time to re-introduce this multi-solution product to your borrower base and help them grow your business in this market.
What is a HELOC?
HELOC is short for Home Equity Line of Credit and is a revolving line of credit obtained relative to the equity in a borrower’s home. A HELOC is similar to a credit card in that borrowers can draw funds off the line and then pay it back over time, only with a much lower interest rate!
How much can be borrowed?
HELOCs are similar to traditional loans in that borrowing power will be based on the equity in the borrower’s home, their income and liabilities, and their credit score. Our product with First Savings Bank can allow you to go up to the full value of your borrower’s home, but this is dependent upon guidelines for the 1st mortgage.
Why take out a HELOC?
- Home improvements – Instead of taking out a separate loan or running up large amounts on high-interest credit cards, using home equity to increase a home’s value with improvements is a smart move.
- Medical expenses – Hospital bills can add up quickly and HELOCs allow borrowers to alleviate the weight of this burden by taking advantage of their low-interest rates and more extended payment periods.
- Tuition or education costs – Student loan rates are often higher.
- Security – borrowers have the equity in their home available at the swipe of a card should a financial emergency arise.
- Debt consolidation – HELOCs provide a great way to pay off debt, provided borrowers don’t continue to withdraw more than they owe.
- Increased purchase power – Borrowers can utilize the HELOC product to increase down payments, allowing them more purchasing power or give themselves a better 1st mortgage knowing they will be paying down the HELOC soon after closing.
What are the pros and cons?
- The biggest perk of HELOCs vs. other loan products is that they allow borrowers to use and pay interest only on the funds they need.
- They’re very affordable. Even though HELOCs come with variable interest rates, they are still a better option than other products. The average interest rate on a HELOC is now 5% – 8%. Credit cards are currently offering rates between 16% and 19%.
- Even though borrowers will owe interest on the amount borrowed, they can receive a tax deduction if they use it for home repairs or renovations. Consult a tax professional for tax advice.
- Avoid mortgage insurance! Borrowers can structure their loans to avoid mortgage insurance payments.
- Variable interest rates – It can be hard to budget with rates that continue to fluctuate over time.
- Transaction fees – With some HELOCs, borrowers are charged a fee each time they make a withdrawal. Multiple withdrawals can significantly impact the balance of the loan. Having a plan in place for when and how much can be borrowed can help reduce these accrued charges.
- They’re voidable – reduce or cut off the borrowing limit of the HELOC if significant changes occur, such as the value of your home decreasing or if the housing market declines.
Is now a good time to get one?
The current housing market boom coupled with the economic fallout of COVID-19 has generated historically low interest rates. Many experts believe now the perfect time to take out a HELOC with manageable payback terms.
If your clients are looking for a smart way to gain access to additional funds, contact FSB Mortgage today and ask which combination of products would be right for them.