Bobby Kittleberger and his wife Danielle bought a home in Sandston, Virginia in 2020 — but the home needed urgent work to rebuild a collapsing porch.
The couple consulted a financial advisor, who suggested that taking out a home equity line of credit (HELOC) could give them quick access to the money they needed to complete much-needed home renovations.
The interest rate at the time was only 4 percent and the couple was able to open a line of credit worth more than $100,000 with the local Bank of The James.
“We replaced the back deck and used the rest to set up a laundry room upstairs and build a walk-in closet for my wife,” Bobby, 35, told .
And they are by no means alone. Americans are increasingly using their greatest source of wealth as a lifeline in times of need — borrowing against the value of their homes, which has skyrocketed since the pandemic.
Bobby Kittleberger and his wife Danielle have taken on a HELOC worth over $100,000 to fund renovations to the home
According to analytics firm Black Knight, US “capable equity” – the amount available for borrowing or borrowing while maintaining a 20 percent equity cushion – has increased 56 percent over three years to $9.3 trillion. dollars up.
A HELOC offers an amount of money, similar to a credit card limit, with your home as collateral.
Unlike a home equity loan, a HELOC has a variable interest rate.
Some come with an upfront fee, but homeowners only pay interest on the amount of credit they actually spend.
Mortgage rates have skyrocketed in recent months – and Americans are now facing their highest interest rates since 2002.
Data from federally-backed lender Freddie Mac this week showed that a 30-year fixed-rate mortgage is currently at 7.09 percent.
Lenders hit by the financial crisis have typically been tough on HELOCs – these are considered relatively risky for banks as the line of credit is repaid after the primary mortgage debt.
But skyrocketing mortgage rates are making cash-out refinancing unattractive for most homeowners — making financial institutions more open to HELOCS.
“The phones in the mortgage refinance department aren’t ringing.” “The way to get equity out of home has transitioned to the HELOC,” Greg McBride, chief financial analyst at Bankrate, told Bloomberg.
Americans are facing the highest mortgage rates since 2002 as experts warn that higher borrowing is stalling the housing market
In 2022, 1.41 million HELOCS were approved – 34 percent more than the year before. According to the credit agency TransUnion, it was the highest total since 2008.
While it’s a way for people who’ve seen their homes appreciate in value to gain access to cash, variable interest rates dictated by broader credit conditions mean HELOCs are hit by the Federal Reserve’s aggressive rate hikes to fight inflation.
Last month the central bank raised interest rates to 5.25-5.5 percent – a range not seen since early 2001 – and expectations are mounting that another hike could be on the cards in September.
When Bobby and Danielle, who run the online publication Guitar Chalk, applied for their HELOC, it was based on the estimated value of their home, which was more than they paid for it. This meant that the line of credit was worth more than her equity in the house at the time.
The interest rate on the credit line was originally 4 percent, but it is now more than 8 percent.
The Federal Reserve hiked interest rates by a quarter of a percentage point, bringing benchmark borrowing costs to their highest levels in more than two decades
“It was definitely a surprise to me and it was kind of bad timing because we bought it so cheaply.” I should have been a little smarter. “Interest rates were historically low – of course they would go up,” he said.
“We haven’t used the money for now.” “We’ve paid it back and I think we’ll either wait until we’ve paid it all back or wait for the interest rate to settle down a bit.”
Still, he said he had little regret taking the loan as it helped him achieve what he needed at the time.
“You have to deal with the variable rate or avoid the loan altogether,” he said.
While some Americans use HELOCs as a source of emergency cash, others use them for more lavish purchases.
Marketing manager Raychel Kolen, 42, opened a HELOC with her husband to fund the purchase of property in Baja, Mexico, after falling in love with the place over the course of a series of vacations.
The Pacific Northwest couple considered taking out a loan from a family member, but ultimately decided that opening a HELOC using their home, which they bought in 2018, was probably the best option.
Marketing Manager Raychel Kolen, along with her husband, opened a HELOC to fund the purchase of a property in Baja, Mexico
The home came with a right of first refusal on four acres of adjacent property, and the couple had bought the property to prevent it from being bought up by developers.
After a local credit union approved their HELOC, the couple used the money to buy the land in Mexico.
They were soon able to sell the four hectares of land in the USA to private buyers – and use the proceeds to pay off the HELOC.
Although it pays off, Raychel and her husband keep the HELOC open in case they need it. All they have to do is hold $5 in a checking account with the credit union.
“I feel like HELOC gives us confidence that we have that additional source of funding when we need it,” she said.