Home equity — time to cash in?

Low interest rates, rising home prices, and consumer confidence are fueling a return among homeowners to home equity loans and home equity lines of credit (HELOCs).

Data in a 2016 report from the mortgage data firm CoreLogic, Home Equity Lending Landscape, shows a year-over-year increase of 21% in HELOCs for the first three quarters of 2015, after years of being out of favor in the wake of the housing market crash that began in 2007. The report contains the firm’s most recent data.

The average line limit was nearly $119,000, according to the report, an increase of about $10,000 compared to the same period in 2014, with lines of credit outnumbering home equity loans by four to one.

In the past four years, home equity among mortgage holders nationwide has nearly doubled to $6.9 trillion. As those equity positions increase, tapping that value can be a good option under the right circumstances for homeowners seeking to fund renovations or other property improvements, consolidate debt, or cover a major expense.

Although they have similar names, home equity loans and home equity lines of credit are different. While both use the equity in your home as collateral, a home equity loan provides a lump sum disbursement to the borrower and a home equity line of credit provides a maximum line limit to be drawn for usage or paid down at any time during the life of the equity line.

Although both offer low rates and tax advantages, there are specific advantages in choosing either a home equity loan or home equity line of credit.

Home equity loans

• Low interest rates — A home equity loan rate is much lower than rates for credit cards and other consumer loans, mainly because lenders view it as lower risk. The fact that it’s secured by your home gives lenders confidence in your ability to repay the loan. Current interest rates range from 4.88% to 8.50% APR. Current credit card rates often are in the mid-teens and can be more than 20%.
• Tax benefits — You will likely be able to deduct 100% of your interest payments, unlike for personal loans. You could also potentially deduct up to $100,000 of home equity debt if you itemize deductions ($50,000 if married and filing separately). Consult a tax adviser for further information regarding the deductibility of interest charges.
• Speed and stability — Home equity loans carry fixed interest rates that will not vary during the life of the loan. Credit cards and other types of loans can raise APRs or carry variable rates or annual fees. You will also receive an amount of cash immediately, allowing you to use it to consolidate debt, or for expenses such as home improvements, medical bills, college costs, or other purchases.

Home equity lines of credit

• Low interest rates — Like home equity loans, interest rates for lines of credit are lower than for credit cards or other types of loans. Current interest rates range from 4% to 8.77% APR, while credit card rates again are often in the mid-teens and can be more than 20%.
• Tax benefits — As with home equity loans, you will likely be able to deduct 100% of your interest payments, as well as potentially being able deduct up to $100,000 of home equity debt if you itemize deductions ($50,000 if married and filing separately). Consult a tax adviser for further information regarding the deductibility of interest charges.
• Flexibility — Once you obtain a line of credit, you are able to draw on it as needed, making payments only when you use it, similar to using credit cards. Frequently, the homeowner pays interest only for a period of time and only later paying principal, as well. Some homeowners rely on a line of credit as a cushion for emergencies and might never tap it during the term of the loan.
• Variable rates — A homeowner with a line of credit has the option of refinancing during the term of the loan, by either combining it with a mortgage or replacing it with a second mortgage, depending on how much equity the owner has in their home. Some HELOCs offer an option of switching to a fixed rate of interest before the term expires.

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There are some circumstances in which a home equity loan or line of credit might not be the best choice, and you should consider other financing options. For instance, they are often not the best option for short-term expenses because you might pay more in interest even though monthly payments might be lower, or if you are planning to sell your home soon because the loan would need to be paid in full at the time of sale. An exception could be if you used the loan for home improvements to increase its value, thus obtaining a higher sale price that allowed you to repay it. Another example would be college expenses — depending on your financial situation, it might be more cost effective to obtain low-interest federal student loans than to seek a home equity loan or line of credit.

Tapping into your home equity can be attractive because it’s relatively easy, affordable, and available. Your banker or financial advisor can help you evaluate your situation so you can determine how much debt you can afford and whether a loan or line of credit is appropriate for your overall financial plan. 

Brian Showers is mortgage sales manager (NMLS # 552764) and Amber Tenpas is vice president retail and business banking manager for Wisconsin Bank and Trust. Member FDIC, Equal Housing Lender

The information and opinions herein are for general information use only. Wisconsin Bank & Trust does not guarantee their accuracy or completeness, nor does Wisconsin Bank & Trust assume any liability for any loss that may result from the reliance by any person upon any such information or opinions.

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