What the Tech is a HELOC?

Do you own a home with a ton of equity?

In this episode, I talk about the awesomeness of a Home Equity Line of Credit (HELOC).

I cover the pros, cons, and how they compare to other options that may be available to you.

Transcript

Lucas Casarez, CFP: 0:00

sometimes I am hesitant to recommend a home equity line of credit if I'm worried that my clients. Are not actually going to manage it well. So if I'm worried that they're just gonna tap into it and do a lot of crazy stuff

0:35

dIT DIT, DIT DIT disclaimer, alert. This information is for educations. Don't just go use it first consult with your financial advisor because that's way more legit. That's it. That was Orlando Gomez and you can catch him in season three, episode four on how he broke into tech by writing a jingle.

Lucas Casarez, CFP: 0:55

Hello, thank you for joining Techie Personal Finance Bootcamp. Thanks for joining me today. I'm gonna be talking about Home Equity Alliance and credits also called HELOCs. And they're awesome. They're super flexible. They're gonna be super relevant to everything going on today, right now with financial stuff, with life stuff, with work stuff. So I'm gonna be diving into all that, the primary reason. kind of this has been sitting in my mind for quite a while, is because I'm constantly hearing news ads on this radio station I listen to where they're trying to talk people into doing a cash out refinance for their home mortgage, even if the new interest rate now is higher than that of what they had before. So it's kind of crazy. They're trying to talk people into getting a. Mortgage at a higher interest rate and giving up the old super, super low interest rate. And they're saying you should do that because of credit card debt to go on vacations, they're, it's definitely bad advice. But obviously it's advertisement. They're trying to make more business for themselves. They don't necessarily care about that. The end person being hurt by making such a, a poor financial decision. So if you. There was a reason to tap into funds. A home equity line of credit is gonna be a good option where you're able to do those things without refinancing the whole loan at a new higher interest rate. So that's one thing. Another secondarily reason that this has been kind of top of mind is the fairs of recessions, the stock market and, and everything that's going crazy right now. So one of the things you can do best, there's a lot of things you can't do that are out of your control with regards to the recession, but one thing you can do is. build up emergency savings if you don't have an emergency savings built up. Well that's something where a home equity line of credit might be super helpful. And so let's get into the just kind of nuts and bolts. What is a home equity line of credit? How does it work? So first off, you have to have a home in order to, to have a home equity line of credit. And the reason for that is because you're gonna be using the equity that you have built up in your home to be able to, to use and leverage in case of emergency, in case there's different opportunities that come up. and for example, if, if someone were to have purchased a house three years ago for 400,000, but now it's worth 500,000, Well, they have a hundred thousand in equity just from the growth. But they also may have made a down payment. They also may have made like material updates to their home and increase the value that way. So there's additional ways you can increase your equity besides the equity just going up naturally on its own. And so that's a huge resource that typically it's, it's stuck there. You can't, can't use it unless you follow that bad advice of the commercials and, and cash. The take some cash out of your home and do a refinance, but as I kind of highlighted, that would be a horrible mistake right now, just cuz interest rates are about 3% higher, most likely than the mortgage that you have originally. And you don't wanna do that for large balances. If you have$300,000 on your mortgage you don't wanna go from a 2.75%. To a 6% mortgage all because they're saying that you should take the money and go on vacation and unlock yourself in at a higher rate. Definitely don't do that. So, The reason why I love home equity lines of credits, and you might have heard of another alternative just called out home equity loan, a little bit different. And here's the biggest difference I'll mention right now. So the thing I love about the home equity line of credit is you actually don't have to take out money if you don't need to. What a home equity line credit does, it's kind of like a. Between mortgage and your credit card. So the cool thing about your credit card is you can have it just in case emergency. You can have it just in case there's an opportunity that comes up and you don't need to pay any interest on it if you don't borrow funds. The home equity line of credit is the same way if you don't need the funds. Well then you don't need to pay interest on anything. It just sits here as a reserve. You'll get pre-qualified for whatever that line of credit number is. So maybe you get a, a$50,000 home equity line of credit. You're not paying interest on that unless you start borrowing it. And then you can do it in different waves. You can. Borrow a big chunk of it. You can borrow a smaller chunk and you can pay it down, make payments, and if you make payments, then that means there's more for you to borrow again in the future in case you need access to it again. So that's how it works, like a credit card. And it's definitely different than a mortgage. With your mortgage. You pay down your mortgage payments, you don't get access to the equity as that's going along unless you have something like a home equity line of credit set up. So super flexible. You have it just in. Don't need to use it. And there's basically no fees most of the time. It, it does depend on the lenders. Some lenders will definitely charge you for a closing car, titling if there's an appraisal and things like that. But what I've been seeing for my clients that I've been looking at different options like this for is, they're most of the mortgage companies, the home lender, they're saying, you know what, if you get a home equity line of credit with us, we're gonna cover those costs. And for the most part, I've seen them come in as pretty close to$0 basically to get those things lined up. So that's a nice, huge ability to borrow against these funds if you need it. Super flexible and very low cost if you don't need anything. And, and if you do start to borrow another great benefit. Well, the rate is gonna be a lot lower than what it would be on a credit card. Credit card. Interest rates right now is about 22, 20 3%. So very painful if you actually borrow funds and are unable to make that credit card payment in full. Cuz you'll start accruing 22% interest for home equity line credits. I was looking right before the fed increased the rates, but last week I was seeing as low as 5.25. Saw a lot of 6%, so 5.2. or 6%, if you did need to borrow money outta your home equity and and are unable to pay that back quickly, that's gonna be the rate that you're gonna pay it at. One potential downside is the rate typically is gonna be a variable rate. So even if it said 5.25% and you open up a home equity line of credit, now if interest rates keep rising, it's possible that interest rate might go up by the time you start using it. One benefit in future that you'll wanna look. when you take out a home equity line of credit is a lot of times they'll allow you to block in a rate after you actually borrow funds. So they won't let you lock in a rate, right? When you get the home equity line of credit. But let's say for example, you borrow$10,000, they'll say, Hey, if you wanna lock this in, this is the rate. You can do that. And you can say, yep, let's lock that 10,000 I borrowed at whatever that rate is. Then you don't have to worry about interest rates moving on your or. Another interesting feature that typically I don't recommend people use unless it is truly a case of emergency, but a lot of home equity line of credits actually only required that you pay the interest only. So if you borrow 10,000, like in that example, and the interest rate is 3%, well that would be about$300 eight. You'd end up paying over the course of the year for that and. if that's all you could afford or if that's all you wanted to pay, you could just pay that over the course of the year, not pay the principal down so that 10,000 would still be owed and you can just kind of keep carrying that forward. What I've seen most often is you can do that for typically 10 years, so it's called a 10 year drop period. after that, then there's a 10 year repayment paired, so they do want you to start paying it back eventually, but they're super flexible. They'll allow you to just pay the bare minimum, just pay the interest accruing and not pay down the principal balance, and then you can go ahead and pay that down. In that second set of 10 years, the following 10 years, it will be the repayment period. During that repayment period. Typically, they're not gonna allow you to borrow any more funds out, so you'll definitely wanna plan accordingly if that's something that you're interested in and want to do kind of long term. for most of my clients because the interest rate is a little bit higher, being in the five and 6% range versus 2.75% range for a normal mortgage. I don't necessarily recommend not paying it down or not having a game plan for paying it down. So that's something that's, you can kind of decide where your goals are in, in situations, but that's where it's super helpful. In case of emergency, Recession's, something that you're worried about. You lose your job. You didn't quite build up the emergency savings or where you wanted it to be. I have a lot of bootcamp clients that just finished a bootcamp, took a couple months to land their first position, kind of burnt down through their savings a little bit. in something like a home equity line of credit. If they had something like that established ahead of time, they could borrow against the home equity line of credit, have a very small required payment, and use a home equity to kind of carry them through those tough months. while they're trying to build up their. savings accounts or if they are laid off in a time like that, there's no urgency to have to pay it back quickly and they have a nice buffer to supplement any emergency savings they were able to build. So that's another situation where it might be super helpful. Other reasons why people might use something like a home equity line of credit. So emergency savings mentioned that. Business venture business opportunity. This is a real life example. That was something that me and my wife were gonna implement. If you've ever heard by a story of how level up financial planning came to be, I gave my work two months notice. At the same time we were going through the home equity line of credit application process. I think we were a week out from closing, and so I gave. Worked two months notice. Ended up being about two to three days later. I was no longer working there. And once that happened, I no longer had the income to support getting a home equity line of credit. So the game plan was to have that in place. And, and I thought the two months it was gonna be good kind of runway buds since it ended up being two days. That didn't work out, but I was gonna use it for a business venture, kind of just in case emergency there might be investment opportunities, so maybe you can buy a business, maybe there's property that you're looking to buy and you can't get it the traditional way or. or you need funds for a down payment on a property or something like that. That's where home equity line of credit. Again, because it's super flexible, you don't have to use it for one thing or another. You can use it for something frivolous. I don't necessarily recommend that. if it's not gonna be a good thing for you overall financially, but that's as loose as it is. Don't do anything illegal. I don't think they necessarily check stuff like that, but it's super flexible. You're able to use it for whatever you can kind of dream of and think of. Paint off. High interest debt is another example too. So if you do, if you found yourself like, I got a hundred thousand dollars in equity in my home, but I have$20,000 in credit cards at 22%. I need to refinance my mortgage again. Going back to the beginning of this whole thing, do not refinance your mortgage just to get a credit card into a smaller interest rate. If that means your mortgage is gonna have to jump up by a significant. Amount. Instead, you can do a home equity line of credit and move that 22% credit card down to a five or 6% range, and that that will give you a lot, lot lower payments, a lot less interest that you're gonna be paying, and a little bit more flexibility, paying that off as well from the credit cards and. Definitely will make your life a lot easier. So that's another good example. If you have high interest debt sometimes I'll see private student loans too that are like 10, 12, 15%. So that would be another thing that typically carries a high interest rate that you're able to avoid altogether and get a much lower, more manageable interest rate and, and navigate those things. So that's all the, the great futures and benefits. Again, I mentioned the downside with that interest rate being a little bit variable. Another thing I would say too is that sometimes, sometimes I am hesitant to recommend a home equity line of credit if I'm worried that my clients. Are not actually going to manage it well. So if I'm worried that they're just gonna tap into it and do a lot of crazy stuff with no intentions of, of doing well financially well, I, I might, might not make that a recommendation for them. Because you truly can, you can start to supplement your lifestyle and say, Hey, we got this thing that we can just tap into as much as we want. There's so much money there. We can do this every single month and just live a little bit larger. Do a little bit. then what we actually can afford because you're able to edit your. For, for a short term situation, if there's some strategy behind it and, and eventually you're gonna make more income or you're eventually gonna weed this thing off, that might make sense. But you definitely don't want to create, use this to create a lifestyle that you can't afford. Cuz eventually the equity will run out if the. Real estate market doesn't keep going up in value as fast as it had in the past. You can definitely tap into all that equity and all of a sudden be like, oh, auto funds. Now you're going on credit cards to support that lifestyle. So that's really a downside if you're worried about the discipline aspect of not managing that well. And it is just a common thing where you spend more, if you have access to more, if you're not kind of thinking long term and thinking more strategically about, well, this is a tool to help you, not necessarily a tool, just to live a, a crazy lifestyle. Because again, this won't support that Indefinitely by any means. So thanks for joining me today, talking about home equity line of credits. Definitely good to. Record a quick one because this has been on my mind for a while and I, I've been meaning to write a blog post or, or do a video or podcast on it, so I'm, I'm gonna do all of the above with this information. Thanks for joining me today.,