HELOCS is the New Refinancing
A home equity line of credit (HELOC) is a line of credit secured by your home that gives you a revolving credit line to use for expenses or to consolidate higher interest rate debt on other loans such as credit cards. A HELOC often has a lower interest rate than an unsecured form of debt, like a credit card, and as a bonus, the interest rate may be tax deductible. Always consult your tax advisor regarding deductibility.
So, what’s the difference between refinancing and a HELOC? Refinancing pays off your existing first mortgage. This results in a new mortgage loan which may have different terms than your original loan (meaning you may have a different type of loan and/or a different interest rate as well as a longer or shorter time period for paying off your loan). It will result in a new payment amortization schedule, which shows the monthly payments you need to make in order to pay off the mortgage principal and interest by the end of the loan term.
A HELOC is usually taken out in addition to your existing first mortgage. It is considered a second mortgage and will have its own term and repayment schedule separate from your first mortgage. However, if your house is completely paid for and you have no mortgage, some lenders allow you to open a home equity line of credit in the first lien position, meaning the HELOC will be your first mortgage.
To put it simply, refinances extend the length of your existing mortgage loans, while HELOCs add a second loan to your current one and therefore an additional monthly payment.
Nowadays, high mortgage rates make refinancing less attractive, so many folks are turning to HELOCS. Homeowners are increasingly tapping their equity in their homes, taking advantage of major gains due to years of rapidly rising home prices. HELOCS have increased 47% since 2021.
“HELOCS and home equity loans continue to grow at unprecedented levels as homeowners increasingly take advantage of the record levels of tappable home equity they have built in their homes,” said Joe Mellman, mortgage business leader at TransUnion.
With higher prices for food, energy, etc., many people are seeking extra cash to get by. For example, credit card balances have risen to a record high 931 billion in the last three months of 2022. A 19% increase over last year according to the credit agency, TransUnion.
Still, years of rising home values have made home equity a tempting option. Tappable homeowner equity jumped 18% in the third quarter from a year earlier to an all-time high of $20.2 trillion, TransUnion said.
When interest rates were very low in 2021 and part of 2022, many homeowners drew upon their big home equity gains through refinancing. Now, however, that has changed. A very sharp rise in mortgage rates knocked the housing market into a historic slump in 2022. As rates on a 30-year home loan soared to the highest level since 2008, home sales cratered and demand for mortgage refinancing slowed dramatically. By the end of the third quarter, refinancing was down 84% from a year earlier to a record-low, TransUnion said. “This overall demand to tap home equity has been around for a few years now; it’s just shifting from cash-out refi into HELOCS.”