Look around and you might notice that your family, or your neighbor's family, is getting bigger. Although some have called 1985 one of the most economic unluckiest years to get married, today's millennials are finally coming into their own. That means more purchasing power, more home equity, and greater opportunities to raise their families. And given that millennials are the second-largest generation after the baby boomers, this promises to have effects on the economy at large.
But there's a problem. A dip in home sales. With fewer homes on the market, but with a growing swath of the population ready to "size up" in their houses, there's going to be an impasse. One solution is simple: renovating your home to make it grow, and help it meet your growing family's needs.
For years, one way for homeowners to do this was through a cash-out refinance. This mortgage structure allows homeowners to take "cash out" against their home equity, giving them the funds necessary to renovate a kitchen or add a new couple of rooms to their existing home. The trouble? The cash-out refinance makes sense in a low-interest-rate environment. But in a rising interest rate environment, like we're looking at in 2022, refinancing a mortgage could mean paying tens of thousands of dollars more on the mortgage alone.
That's why many homeowners are turning to the HELOC.
Reasons a HELOC makes sense for renovations
Renovations can be worthwhile because they change the way you live. But they can also be costly. A new kitchen or a new room in a house isn't a simple purchase that happens overnight. Because of that fact, homeowners often have to tap into the equity of their home to secure the liquid cash they need to fund a home renovation.
This year, home improvement and repairs are expected to peak at $427 billion in just one quarter, highlighting how much money homeowners spend. For many homeowners, the only way to come up with the kind of money to secure a renovation is to borrow or re-borrow against the equity they've established in their home. In a low-interest-rate environment, a cash-out refinance would usually be the best choice. If a homeowner could refinance a mortgage at a favorable interest rate and receive cash out on the new loan, it can be a simple way to fund the renovation.
But we're not in a low-interest-rate environment relative to the historically low mortgage rates we saw in 2020 and 2021. Inflation is rising, and with it, the cost of borrowing money is going up. For that reason, a HELOC makes sense as an alternative. A HELOC allows homeowners to borrow against the existing equity of their home, but without having to secure an entirely new mortgage in the process. This means they can avoid restructuring the entire mortgage with a higher interest rate, which would have the potential to cost them substantial amounts of money down the line.
What are the other reasons to consider a HELOC? Let's look at the following:
Adding value to your home
Sinking money back into a home doesn't just make it more pleasant to live in. It can also boost resale value down the line. Bath and kitchen remodeling, for example, tends to return about 70% of the original investment made in terms of resale value. And while that isn't a return on top of the original money put in, it shows the value of a renovation. Not only can you have a better kitchen for years, but when you do sell the home, that kitchen can be a strong sales point to help you get more value on the house.
Ensuring you don't have to move
Let's be honest: not everyone is undergoing a home renovation because they want something bigger and better. Sometimes, it's a necessity. You may love the location of your home for work or schools, for example, but realize there's not a bigger option in the area available. If that's the case, to facilitate a growing family, you may have few options other than to expand your existing home. When you have a good house in a good community and with a good location, sometimes, you don't want to give it up. Using a HELOC can help ensure you don't have to—you might simply need to upgrade your existing home.
Making your home your own
Sometimes companies sell mattresses with an appeal to math: we spend about a third of our lives asleep. But most of us spend more than half of our lives in our homes. Any investment you make into the quality you enjoy when you live in your home is an investment that will pay real, practical dividends. And it won't just make your life better in a vague sense. You will get to experience a new kitchen every day, for example.
But no homeowner has to justify every expense as having immediate and practical benefits. You might simply want to make your home your own. This is, after all, on your dime. Do you want to expand with an office? Another room for your kids, so they can have the childhood you'd always imagined for them? The reasons for renovating your dream home are many, but they all tend to fall under the same category: you want to stay put, and you're in need of a simple upgrade.
HELOC vs cash-out mortgage
Traditionally, a HELOC is a great way to get money for the renovations you need. And traditionally, a cash-out refinance is the same. So why is the needle pointing to HELOCs these days? It comes down to the rising interest rates, particularly if you refinanced your home with a fixed-rate mortgage in 2020 or 2021. Those were two banner years for refinancing, where refinancing peaked because many homeowners had never seen such low-interest rates on mortgages before.
Getting cash out of a new mortgage can be a good way to do it, but not when your mortgage interest rates would go so far up that it outweighs any benefit you might get from the renovations. A HELOC, on the other hand, is a flexible, powerful way to borrow against home equity without reshaping the interest rates you pay on your home mortgage.
How a HELOC from Figure works
Wondering how it all works? A HELOC from Figure includes a straightforward application process in which you can get approval in as low as five minutes, with the ability to borrow up to $400,000 against home equity.
This is more than enough room to finance the renovations you want to make in your home, helping you to stay put in your dream home and squeeze all of the value that you can out of your current location.
In today's economy, it might be the easiest and most flexible way to get what you need out of your home equity. And with Figure, it's so convenient, there may even be an online notary available to help make the process go through smoothly.
1 The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.
2 You should always consult a tax advisor regarding the deductibility of interest and charges to your home equity line of credit.
3 A HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay.
5 Approval may be granted in five minutes but is ultimately subject to verification of income and employment. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person. closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and need to order a desktop appraisal to confirm the value of your property.