June 10, 2024
Author: Jim Nottelmann, VP, Consumer Banking Officer
With interest rates at or above 7% and housing inventory at historic lows, homeowners who were once considering selling their homes have shifted gears and are now deciding to stay put and find new ways to use the equity they have built up in their homes. With this change in the market, home equity lines of credit (HELOCs) have become a popular product that CNB St. Louis Bank offers to take advantage of the equity in their homes.
When establishing a Home Equity Line of Credit, several factors should be considered. Below are some frequently asked questions for how HELOC funds can be used, and some key considerations for homeowners seeking to leverage their home’s equity.
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How Can HELOC Funds Be Used?
Can I use my Home Equity Line of Credit for Home Improvements?
- Home Improvement is the most common use for a Home Equity Line of Credit. The benefit of making improvements to your home is, in most cases, it will increase the value. Not all improvements will equate to a higher value but in most cases, home improvements provide a positive return. Even so, it’s important to remember that the potential increase in value, does not always equally equate to the cost of the improvement. A great example of this is installing a pool on your property. In some situations, a pool will increase the market value of the home, while in others it can decrease value or deter buyers.
Can I use my Home Equity Line of Credit to Buy a Car?
- Yes, you can. However, a line of credit typically has a longer repayment period. If you make just the minimum payment, you will still have a balance owed at the end of the term. Additionally, the value of the car will have depreciated and may not be worth what is still outstanding on the line of credit. In short, just because you can, doesn’t mean you should. Consult with your banker or other financial advisor about your unique situation and the pros and cons of buying a car using your home’s equity.
Can I use my Home Equity Line of Credit to Consolidate Debt?
- Debt consolidation is another common use for a Home Equity Line of Credit. The rate of a HELOC is typically lower than standard credit cards, making a credit card paydown with HELOC funds a seemingly advantageous financial decision. The idea is to eliminate higher-rate debt into lower-rate options providing you with monthly savings to allocate elsewhere. If you are seeking to use a home equity line for consolidating debt, here are some things to consider:
- Make sure this is not a short-term fix for monthly cash flow problems (i.e. paying the day-to-day shortfalls).
- Paying down a credit card usually means you also gain credit availability. Accumulating balances to replace the ones you paid off makes this strategy a debt increase, rather than a debt consolidation.
- Beware – a paydown can often trigger a credit limit increase. Remember the idea is to consolidate debt, not increase your debt.
- Make sure your budget can handle the new loan payment. Some HELOC products offer interest-only monthly payments, while others will expect some principal pay down each month. Create a budget and stick to it!
Can I use my Home Equity Line of Credit to Pay for College?
- This one is not so much a total avoid as much as a “consider carefully”. The advantage of using your HELOC for college is you can withdraw tuition as needed and begin paying back immediately, reducing the long-term obligation after graduation. The downside is, there are other financial options available to pay for college at lower rates without risking your home.
Can I use my Home Equity Line of Credit to Invest in Real Estate (or anything else)?
- Investing is always a good objective, but using HELOC funds is a debatable idea. Real Estate is particularly speculative and not a liquid investment, meaning it cannot quickly be sold for cash without a potential loss in value. Even if your real estate investment goes well, it can take years to realize any appreciation. Getting your money back out of a real estate investment to pay off your home equity loan can be a time-consuming process. The stock market can be an even bigger risk! Borrowing for speculative investments, whether real estate or other investment vehicles, is something to be carefully considered with your financial advisor.
What are things I should know about with a Home Equity Line of Credit?
- A HELOC is revolving credit: A home equity line of credit is a form of revolving credit. Like a credit card, you have a limit for the maximum you can draw. Your credit limit minus your outstanding balance is what you have available. As you pay your balance down, the availability returns respectively. When there is a zero balance, there is no monthly payment obligation.
- Your payment may change during the term of the loan. Home Equity Lines of Credit are usually priced using a variable rate tied to the Prime Rate Index and may change, up or down, along with changes in the index. This can affect your payment both positively and/or negatively.
- Your home is the collateral for this line and is "on the line." Typically, this loan is a 2nd mortgage (a 1st mortgage if you don’t have an existing home loan). Collateral is what banks will liquidate should a borrower default on their loan. Do not take this lightly!
- Home values can change. Right now, values are trending higher but as we have seen in the past, that can change. Why does this matter? If home values decrease, you could end up owing more on your home than it is worth.
- Beware of paying only the minimum payment. Home equity lines of credit payments are not structured like term loans. Many ask for minimum payments of interest only, and some ask for interest plus some principal. While this offers a lower-than-term-loan payment which can provide great cash flow flexibility, it is important to note that paying the minimum will not pay off your loan balance within the loan term. Consider if you want the line to be paid off or have a balance due at the end of the term and make your monthly payments accordingly.
- Have a budget and an exit plan. The key to having a Home Equity Line of Credit is being responsible. Understand if you will have a balance due at the end of the term and prepare accordingly to avoid a stressful financial situation.
How Much Can I Borrow Using a Home Equity Line of Credit?
What is the difference between a Home Equity Loan and a Home Equity Line of Credit?
A line of credit isn’t the only way to leverage the equity in your home. Most banks also offer a Home Equity Loan or Home Improvement Loan. These loans are term loans rather than revolving lines of credit. Many times, these loans are amortized over the term over the loan, meaning the payments are designed so that when paid as agreed, the loan will be paid off in full by the end of the term. CNB St. Louis Bank offers both loan and line of credit options, along with a special program called the HOPE Improvement Loan to facilitate home improvements for borrowers who meet special criteria.
Start Your Application Process!
To learn about the Home Equity Loan and Line of Credit options available at CNB St. Louis Bank, click on the link below or contact one of our home equity line of credit specialists.