By Lauren Rosales-Shepard, Content Writer
The home remains the largest asset for most of us, and is one of the most straightforward ways to grow wealth. But it can be difficult to realize that wealth and turn it into a liquid asset you can actually use! If you have to sell your home to come into the money, does it even count? It’s hardly surprising that homeowners are sitting on a record amount of equity–what else can they do with it?
One of the most popular answers to this question is to tap into that equity with a loan of some kind. You’ve probably heard about them in passing–home equity loans, refinancing, reverse mortgage, HELOC. HELOCs in particular are frequently in the news, with journalists trumpeting whether rates are up or rates are down. Let’s dig a bit deeper and consider the HELOC from multiple angles.
“HELOC” is an acronym for a “Home Equity Line Of Credit.” Think of it like a credit card: the bank converts your equity into a line of credit, against which you can borrow whenever you’d like. Usually, there’s an “initial draw period” of five to ten years, after which you would likely have 20 years to steadily repay what you borrowed–plus interest. You only pay interest on the funds that you actually use, not the lump sum that is technically available. So, in theory, if you never used your HELOC, you would never need to pay the interest; after all, what’s the interest rate on zero?
Because you technically only pay the interest on any money you actually use, many people consider taking out a HELOC purely to have on hand ‘just in case.’ If you never need it, you need never worry about paying interest ‘back.’ Plus, you have it right there waiting to be used, as immediately as necessary. However, be aware that taking out a HELOC isn’t actually free. Closing costs can total between 2-5% of the amount made available to you, and cover fees for origination, filing, appraisal(s), credit report(s), title, and document preparation. So even if you never dip into the HELOC itself, you will still have to pay these fees.
It’s important to remember that when you open a HELOC, you are using your home as the collateral. This means that if you aren’t able to keep up with payments, whether the initial interest payments during the draw period or the later repayments, you could be in danger of losing your home to foreclosure. It’s also important to note that a HELOC is a lien on your property. If you don’t remember to actively close the account with the lender after they’ve been repaid, even if a great many years have passed without further activity, you will find that the lien on your home remains. Or if you took out the HELOC to act as your emergency fund but never needed it, and then forget that you ever had it, the lien is still there. That lien can cause major headaches by posing complications and delays if you want to sell your home.
Having a HELOC in your backpocket can be quite convenient–but perhaps too convenient. If you struggle with self-control when it comes to spending money, a HELOC might present you with too much temptation to resist. Although you certainly could use a HELOC to pay for a vacation, increase your spending capabilities at Christmas, or elevate your lifestyle, it isn’t a good idea. If your regular income and habits don’t support those endeavors, how can you expect to eventually pay back the principal sum? Even if you don’t indulge in large purchases, those smaller impulse buys can really add up. It’s difficult to check the habit of spending–because consumer behavior often reflects our desire to forge and present our identities, it’s easy for us to indulge a bit too much in our inherent quest for self-definition and expression. During the COVID-19 pandemic, too, online shopping became an outlet for many, whether it was in an effort to improve mental health or to simply get outside the house!. We may be able to leave our homes now, but we still often shop from our computers and phones.
Another key factor regarding HELOCS: they tend to have variable, rather than fixed, interest rates. It can therefore be impossible to know exactly how much you will owe over time, which is a pretty sizable obstacle to any long-term financial planning. One blogger became so frustrated with the nebulous, ever-changing status of her HELOC that she altered the acronym’s meaning to “Having Evidently Little Outside Control.” If you don’t have a trustworthy bank, like this homeowner who had taken out a HELOC to pay for extensive home renovations, you may also run into Big Problems. After using the entire line of credit, she describes how “We couldn’t seem to get a straight answer from the lender on how much we’d need to pay per month in order to pay it off in X number of years.” Another homeowner struggled with intense sticker shock when her lender informed her that she should expect a bigger monthly payment when she started to pay down the principal–but didn’t initially explain by how much. Bottom line: between unstable interest rates and dissembling, evasive lenders, it might not be possible to ever know just what you’re getting into with a HELOC.
None of this is to say that a HELOC is always a bad idea! There is no doubt that the flexibility a HELOC offers might be well-suited for many, especially if they already have a bank or lender who they trust, and are confident in their ability to resist the temptation of impulse purchasing. And if the upfront costs don’t deter you, an emergency HELOC could end up saving the day in an unexpected crisis. However, if monthly payments and unpredictable interest rates are going to interfere with your ability to make long-term plans or live your life to its fullest potential, you might want to consider a different option.
A Unison equity sharing agreement enables you to tap into your home equity without demanding that you make burdensome monthly payments, or worry about the instability of interest rates. Instead, you get up to 17.5% of your home’s current value in cash in exchange for a percentage of its future change in value when you decide to sell. Many partnering homeowners use their funds for renovations, saving for retirement, starting a small business, consolidating debt, or diversifying their financial portfolio–in other words, to live the life that they’ve always wanted. Curious? Learn more today.