U.S. homeowners with mortgages have seen their home equity increase nearly 12 percent year over year. That represents a gain of almost $871 billion since the third quarter of 2016. Most homeowners recognize that having more equity in their homes is a good thing, but do they know how to leverage it – and capitalize on it?
Savvy homeowners are leveraging this jump in home equity through home equity line of credit, or HELOCs. A HELOC is a line of credit extended to a homeowner that uses the borrower's home as collateral. Borrowers are pre-approved for a certain spending limit based on the equity they have accrued in their home and can draw against this limit for various uses.
This kind of loan option is particularly popular for those who are financing home repairs after the long, harsh winter and for those who are looking to renovate their homes and outdoor spaces for the warmer summer months. In fact, TD Bank’s recent Spring Home Lending Survey found that property values have increased over the last 12 to 18 months for 69 percent of respondents, and close to half (42 percent) said that they are somewhat, very or extremely likely to apply for a HELOC within the next 18 months.
Compared to borrowing funds from short-term loans or using a credit card, one of the reasons HELOCs are attractive is because they’re one of the lowest-cost borrowing options for a homeowner. They also give borrowers the freedom to choose between a fixed or variable interest rate option.
A fixed-rate option can save customers money by not only dropping their interest rate, but also allowing them to pay off the debt in a time frame they choose. HELOCs can also be helpful in consolidating debt at a lower interest rate. Borrowers have immediate access to low-interest funds, which can be useful for those who are looking to pay off debt.
Putting Money Back Into Your Home
Following a tough winter, many homeowners are dreaming of updating their patio furniture, putting in a pool or adding a garden, and are leveraging the boom in home equity to do so. TD’s survey also found that the most popular uses for HELOCs were home renovations and repairs (53 percent), major home purchases like appliances (28 percent) and debt consolidation (26 percent). An added benefit for those financing a home renovation with a HELOC is that some of the costs may be tax deductible.
For those who are using a HELOC to finance repairs and renovations, the most common updates needed are window replacements (35 percent), and heat or air conditioning system replacements (33 percent), and structural repairs (32 percent). The top three cosmetic renovations are bathroom updates (37 percent), kitchen updates (36 percent) and exterior painting (26 percent).
HELOCs are also a sensible option for those looking to increase their home’s value to sell during the summer homebuying season. More than one-third of respondents looking to renovate said they’re doing so to increase the value of their home. Potential sellers should get smart on what can derail a home inspection, however, like a leaking water heater or a loose shingle on the roof, and consider leveraging a HELOC, which can then be paid off at the closing table during a sale.
Homeowners have seen equity increase, and home equity borrowing remains one of the lowest-cost borrowing options for homeowners looking to renovate their home, consolidate debt or accomplish what they most need. With the 2018 home buying season well underway, now is the time homeowners should speak with their financial institution to gain an understanding of how to obtain and leverage a HELOC. Lenders can help homeowners understand the terms, features and multiple benefits of obtaining a HELOC, and find an option that best fits each homeowner’s unique financial situation and future goals.