It’s no secret that home prices have skyrocketed in the last 12 months. Recent industry research shows that home values in the Puget Sound region have risen nearly 20% in the last year, which is right on par with the national average.
While this hike in home prices has made it more difficult for some to achieve the American dream, it has created new opportunities for many homeowners — read: tappable home equity.
What is a HELOC?
A home equity line of credit (aka HELOC) is available exclusively to homeowners based on how much equity they have in their home. A homeowner can calculate their home’s equity by taking the market value of their home and subtracting any outstanding mortgages. This is essentially the part of the home that a homeowner can say is “all theirs.”
A home’s equity can increase over time — each time a homeowner pays down their mortgage, they build more equity. Bonus: A HELOC usually comes with significantly lower rates than other funding sources (think: credit cards or personal loans).
They’re also flexible, in that homeowners can borrow funds only when they need them. This can be a better and more manageable option than personal loans or other home equity loans that come in a lump sum.
“Thanks to higher values and a shifting rate environment, home equity lines of credit have hit the sweet spot for many who want to leverage their home’s equity to pay down debt, fund renovation projects or make other big-ticket purchases,” said Laura MacNeil, PNC Bank regional president of Seattle.
Factors to consider
Before committing to a HELOC, homeowners should carefully weigh these factors:
- A HELOC might lower your interest rate, but if a homeowner fails to make the repayments, their home risks being foreclosed.
- HELOCs typically have variable interest rates — meaning they change with the underlying index used by a lender. A rise of even a few percentage points can add hundreds of dollars to what you pay in a year.
- HELOC interest was 100 percent tax-deductible up until 2017. Nowadays, you can only deduct the HELOC interest you have paid for building or improving the house that was used to secure the line of credit. Pro tip: Consult your tax advisor regarding tax deductibility.
Before a homeowner takes advantage of their home’s tappable equity, it’s imperative they pay attention to their total debt-to-income ratio. A good rule of thumb is to be sure debt obligations are not greater than 40% of monthly income. Surpassing that threshold will make it more difficult to qualify for additional loans + credit in the future.
PNC Bank offers useful tools and resources (for customers and non-customers alike) on how to estimate a home’s equity and find the right lending solutions. 🏡*
