If you're like many Americans, you have a lot of money in your home's equity — far more than in generations past. While home equity constituted about $8 trillion in American household wealth in the year 2000, that number catapulted to 21.1 trillion by 2020 — with little sign of slowing.
The problem for homeowners is that home equity can be difficult to get to. It's not highly liquid, meaning that you can't click a button on your favorite brokerage website and sell it off within a business day. And if you like the home you live in, it may feel like there's nothing you can do to get that money out of your home equity and into your hands.
One option is to refinance your mortgage through what's known as a "cash-out refinance." This mortgage is essentially a loan for greater than the amount you still owe, creating a net positive amount of cash — also called the "cash out." The problem with this approach is simple: it rearranges your mortgage interest rates. And in an inflationary environment, like we're in now, that can mean refinancing for higher interest rates. Higher rates make the mortgage more expensive and can cost you tens of thousands of dollars down the line.
Fortunately, the HELOC (Home Equity Line of Credit) provides an alternative to a cash-out refinance. By borrowing against your home equity at a reasonable interest rate, you can avoid the higher interest rate of the refinance and leave your mortgage untouched. Not only does this yield you the appropriate amount of cash for your goals, but it helps you save money on interest payments in the long run.
HELOC vs. Mortgage
Why favor a HELOC over a conventional mortgage refinance? A cash-out mortgage refinance can work, but only under extremely favorable conditions. HELOCs, on the other hand, can offer competitive interest rates in a variety of economic climates. Let's look at some of the variables that differentiate HELOCs from the "cash-out refinance" approach to acquiring cash on your home's equity:
Retaining your mortgage rate. 2021 was a record-breaking year in mortgage refinancing terms. Homeowners took out more money than ever in refinancing, helping them to secure historically-low interest rates on fixed-rate mortgages. Why was this such a good idea for so many? It locked in low interest rates, hedging against the possibility of inflation. Well, inflation is here — and with it comes higher interest rates. Those homeowners who secured favorable mortgage rates in 2021 would only make their mortgage more expensive if they were to refinance now, especially with a cash-out refinance. A HELOC allows you to take out a loan against your home's equity without touching those favorable mortgage rates.
HELOCs can be easier to pay down. A HELOC doesn't have to be as large as a mortgage. With favorable interest rates, you can pay off a HELOC much more easily than you can a refinanced mortgage. In fact, HELOCs are easy enough to pay down that many people use them to consolidate their personal debt. For example, someone with high-interest rates on the balances of three different credit cards might take out a HELOC and pay down the credit card debt on each of the three cards. This leaves them with only one loan to pay bac k— and a loan with a lower interest rate, at that.
The Value of Having Available Credit
A HELOC is an option that can be in your back pocket. Many personal finance experts recommend keeping an emergency fund or a "rainy day" fund. But what many people don't realize is that a HELOC can serve a similar function—turning your home equity into an "emergency fund" of sorts.
One advantage to the HELOC is that taking one out will help keep your credit utilization low, which is an essential tool for building a healthy credit score. Using a HELOC for emergencies, opportunities like investments and vehicles, or home renovations means that you'll have only one additional loan. This means that other avenues for credit, such as personal credit cards, can be maintained with low balances, which helps promote a lower credit utilization ratio, keeping your credit healthy.
Through the HELOC, you can then use the money for essential reinvestment plans. Some people might use a HELOC to secure an investment in a private business, for example, or to upgrade an aspect of their home that will be essential for boosting its long-term resale value. Having extra credit available to you, in short, provides you with more options. Those options can have a dramatic impact not only on the quality of your life but also a tangible impact on your financial situation. Using a HELOC wisely can help you keep a healthy credit score, which in turn keeps the cost of your future credit low. That's especially important in a rising interest rate environment.
Don't Refinance Too Soon
Many American consumers and homeowners have gotten used to one style of investing: in a low interest rate environment. In fact, One glance at the graph of U.S. interest rates will show you how unusual this is. From the time of the Great Financial Crisis on to just before the COVID-19 pandemic, investors could secure low mortgage rates, for example, which gave them more investment options.
But now, the future is less certain. Inflation is ramping up, interest rates are once more on the rise, and this creates a new problem for mortgage holders: refinancing is less of an option. Refinancing when interest rates are high will only increase the cost of the mortgage, which means that even a "cash out" refinancing option isn't as attractive as it once was.
What's even more alarming in the interest trend is just how much further there is to go. If inflation remains rampant, it's possible interest rates will continue to rise to levels that millennials and first-time homeowners are not familiar with.
Fortunately, HELOCs provide an alternative for investors who need flexible capital but can't refinance their homes, given the current interest rates. As long as a homeowner is able to secure favorable HELOC terms, it's a far more affordable way to access money against the value of the home — without touching the fixed-rate mortgage they already took out.
How a HELOC from Figure Works
Interested in a HELOC, but aren't sure where to get started? The process is simple at Figure. Click "Find My Rate" and go to the section for "Home Equity Line." There you'll see "Find My Rate" again, where you will input your information. This includes basic contact details such as your address, your assets, and your current income. Once everything is verified and you're approved, you can receive your money in as few as five business days.
You'll also be able to choose from different fixed term options, which means that you can lock in interest rates now. That's especially important in a world where interest rates may only be going up. Bottom line? For the savvy homeowner, the HELOC can be a great way to borrow against home equity.
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.