Were your move-up plans derailed this year?
If you were hoping to sell your house and upgrade this year, mortgage rates might have derailed those plans. “A lot of move-up buyers this year got hit with a big surprise: higher mortgage rates,” said mortgage expert Shivani Peterson on a recent episode of The Mortgage Reports Podcast.
“Those higher rates might make you feel like you’ve been priced out of the market,” Peterson said. “They may make you think, ‘I’ve got to live somewhere that I don’t necessarily love until I figure out what’s next.’”
Of course, you could always just bide your time; rates will eventually drop at some point. But that’s not the only option if upgrading was on your 2022 agenda. According to Peterson, using a HELOC to improve or expand your current place could be a viable alternative.
Listen to Shivani on The Mortgage Reports Podcast!
How a HELOC works
A home equity line of credit (HELOC) is a type of loan that lets you turn your home equity (the difference between your home’s value and your current mortgage balance) into cash. That cash can be used for any purpose, including upgrading your current home to make it a more enjoyable place to live.
“This is a line of credit like a credit card, but it’s tied or secured to your home,” Peterson said. “It can let you use some of that equity to remodel the house or build on an addition — give yourself some more space.”
HELOCs as an alternative to moving
According to Freddie Mac, the average 30-year mortgage rate tipped above 6% in mid-September. That means if you bought a home now — particularly a larger, more expensive one — you’d be looking at significantly higher costs; first, from the higher price range, and second, due to higher rates.
That can be especially frustrating if you refinanced in the last few years and snagged one of those record-breaking, sub-3% interest rates. In that case, selling and buying now would meaning losing “your beautiful, magical interest rate,” as Peterson put it.
But a HELOC is a second mortgage with its own separate interest rate and payment. It doesn’t have any impact on your current mortgage, so you wouldn’t lose that “magical” low rate. And a HELOC broadens your future financial options.
One of the major perks of a HELOC is that, as an ongoing credit line, it gives you financial flexibility over time.
“You could pay it down and keep your line of credit open so that if there was an opportunity down the line — additional remodels or another investment opportunity, you’d have the money, “ Peterson said. “Maybe you want to pull cash out to make a down payment on a rental property to add to your real estate portfolio. Once you have this line of credit in place, you can use it for a lot of things.”
Another benefit of HELOCs is that you only pay interest on what you spend — unlike a traditional mortgage loan. This makes them a good financial safety net, with little risk (unless you’d be tempted to overspend!).
“When you don’t use it, you don’t pay anything,” Peterson said. “So when you have that line of credit sitting open and you don’t have a balance on it, it’s just like a credit card. It’s just there. It’s available credit that you have access to when you need it.”
Having a HELOC exit strategy
If you do opt for a HELOC, you might be thinking about future exit strategies. What if your dream home hits the market or mortgage rates finally do fall?
In this case, you’d have a few options.
“When you sell, you could pay off the HELOC with your first mortgage,” Peterson said. “Also, if you refinance your first mortgage, you could pull extra cash out to pay off the HELOC. You could also pay it off on your own with extra money you may have down the line.”
Being a homeowner gives you options
You’re never stuck when you own a home. Equity is a valuable thing, and HELOCs are just one of the many ways you can leverage it. “There are always options when you’re a homeowner,” Peterson said. “You have some amazing tools at your disposal.”
If you need help understanding your options for using your equity — or making any real estate move in today’s higher-rate market — get in touch with a mortgage professional in your area.