I need to get something off my chest.
I owe my clients an apology.
The truth is, there's one area of home financing I could have done a much better job keeping them, and you, updated on.
Home Equity Lines of Credit.
I've always understood the value they can provide. But I wasn't confident enough in the investor partnerships I had to recommend them to my clients.
That changes today.
Allow me to explain.
Millions of homeowners are sitting on "legacy" rates
A massive number of homeowners are still sitting on ultra-low mortgage rates from the COVID era.
How do I know?
Because a large portion of my own clients have rates below 3.5%.
I even have one client sitting at 1.75%.
Insane.
Every day I do mortgage check-ups for past clients, and I find myself saying the same thing:
"Enjoy your legacy rate, because we're never touching that thing again."
And honestly, it makes me proud to say that. Those homeowners financed at one of the greatest times in history.
But those incredible rates can also create a problem.
Many of the same homeowners have watched their homes appreciate a lot over the last several years. They're sitting on equity. Sometimes a lot of it.
And they'd love to access some of it without giving up the first mortgage they already have.
Because if you owe $300,000 at 2.75%, the last thing I want to do is refinance that entire $300,000 into today's rates just because you need $50,000 or $100,000.
Where a HELOC fits
That's where a Home Equity Line of Credit (HELOC) can be incredibly useful.
A HELOC sits behind your existing first mortgage. Your first mortgage stays exactly where it is. Your rate stays where it is. And you get access to a separate line of credit secured by the equity in your home.
Here's what I'm seeing homeowners use HELOCs for today:
- Consolidating high-interest credit card debt
- Home improvements or remodeling
- Education expenses
- Major purchases
- Emergency reserves
- Business or investment needs
And they can do all of that while leaving their legacy first mortgage intact.
How a HELOC actually works
The HELOC programs I'm working with are generally tied to the Prime Rate, so the interest rate can move as Prime changes.
During the initial draw period, you have access to a revolving line of credit secured by the equity in your home.
And this is an important part:
If you're approved for a $200,000 HELOC, that doesn't necessarily mean you're paying interest on the whole $200,000. Generally, interest is charged only on the amount you've actually borrowed.
So if your balance is $40,000, you're paying interest on that $40,000, not the full line.
You can pay the balance down. Access available funds again. And use the line over time as your needs change, subject to the terms of the program.
Depending on the program, payments during the draw period may be interest-only. After the draw period ends, any remaining balance converts to principal-and-interest payments over the repayment period.
Here's another reason I've become more interested in these: they're relatively simple.
One of my clients went from application to signing his loan documents in about two weeks. No refinancing his first mortgage. No giving up his low rate. No starting a brand-new 30-year loan just to get at a portion of the equity he's built.
Equity isn't free money
Here's the part I really want you to understand.
A HELOC isn't automatically a good idea just because you have equity. You're still borrowing against your house. And because most HELOC rates are variable, your payment can change over time.
So I'm not going to tell anyone to pull $100,000 out of their house simply because they can.
The real question is what you're using the money for, and whether tapping that equity actually improves your overall financial picture.
Consolidating 25% credit card debt into much cheaper financing? That conversation may be worth having.
Remodeling a home you plan to stay in for another 15 years? Maybe.
Pulling equity just because you want $80,000 sitting in your checking account? Probably a very different conversation.
Start with the right question
That's why I don't think the answer starts with "How much equity can I take out?"
I think it starts with "What am I trying to accomplish?" Then we work backward from there.
For years, refinancing was the hammer we used for almost every mortgage nail. Today, that's changed. When someone has a 2%, 3%, or even low-4% first mortgage, protecting that loan can be just as important as figuring out how to access their equity.
And that's why I'm going to be talking a lot more about HELOCs.
Let's do a mortgage check-up
If you're sitting on a low first-mortgage rate and you've wondered whether there's a way to tap your equity without blowing up the mortgage you already have, reach out.
I'll look at your current mortgage, your available equity, and what you're trying to accomplish.
If a HELOC makes sense, I'll tell you.
And if it doesn't? I'll tell you that too.
That's what a mortgage check-up is supposed to be.
— Jimmy V
HELOC rates are variable and may change with the Prime Rate. Programs, terms, and availability vary. All loans are subject to credit approval and property eligibility.