Home Equity Loans: Options and Cautions for Homeowners

Home equity lines of credit are valuable for home improvements but risky if used for lifestyle or debt consolidation.

### Navigating Home Equity: Smart Strategies for Improvement Financing
* 🏡  Home equity lines of credit (HELOCs) and home equity loans are popular options for financing home improvements when **liquid resources are unavailable**.
* 💰  With many homeowners locked into low mortgage rates below 4%, utilizing home equity allows them to **avoid refinancing at current rates above 7%** while enhancing their existing homes.
* 📈  The median spending on home renovations has **surged by 60%** from 2020 to 2023, with **23% of homeowners** considering HELOCs for their projects.
* 🔍  It's crucial to understand that not all home equity products are the same; **HELOCs offer flexible access to funds**, while home equity loans provide a **lump sum upfront**.
* ⚖️  When choosing between these options, consider factors like **repayment timeline**, **interest rates**, and whether the improvements will **add significant value to your home**.
* 🚫  Avoid using home equity lines for lifestyle upgrades, debt consolidation, or educational expenses, as this can lead to **increased financial risk** by converting **unsecured debt into secured debt**.
* 📉  Current prime rates are around **8.5%**, making many home equity products **costly**, which emphasizes the need for **careful financial planning** before proceeding with renovations.
* 🔑  Ultimately, evaluate the purpose of your home improvements and ensure you have a **clear repayment plan** to maintain financial stability while enhancing your living space.

[Music] all right BR. We've talked about paying in cash, and then we've talked about liquidating brokerage assets. Well, both of those assume that you have resources ready and available to satisfy the cost of whatever this big expense is. Oftentimes, that's not the case. Oftentimes, people say, I don't quite have the resources available. So, what other options are there for me? One of the most common options available, especially to folks in today's market environment, what we've seen in housing over the past three, four, five years, are home equity lines of credit or home equity loans that exist based off of the equity that you have in your primary residence. Well, this makes a lot of sense. I mean, if you think about it, if you're one of these people that has... I mean, the lion's share of people with mortgages are still less than 4%. Yep. And if you think about it, you're in a house, and you're in a mortgage that's less than 4%. You know

current market rate is over 7% or around 7%. You're probably looking at your house going, Man, I love my mortgage. I even kind of like my house, but maybe it needs some improvements. So, a lot of people, instead of resetting the entire loan, selling the house, and going and buying a bigger house or an improved house, they're making the decision. Instead of locking that entire loan up at 7%, why don't I keep my 4% or lower mortgage, go and make improvements on my existing home to make it my dream place or make it good for my family. But then that does have a cost. That rate is higher because of just what's happening, and I know we have some data on that. Yeah, what's really interesting is when we look at home equity lines, the median spend on new home renovations is up 60% between 2020 and 2023. So, 60% increase in the costs of doing home renovations. Well, a quarter of those, 23% of those renovat

are looking at HELOCs or other loans for improvements on big budget projects. So, a lot of people are trying to figure out, Okay, I've got all this equity. I've not used it. I've not tapped into it. I might not have liquid resources out there available. Maybe I need to consider using this. Maybe I need to consider tapping into the home equity. And we think that that's okay, but you have to be cautious. And the very first thing I think you have to do is you have to recognize that not all home equity type products are created equal. We're talking specifically about home equity lines of credit, but when you start doing your research and looking, you may see there are other types of home improvement loans outside of just HELOCs. Yeah, I mean, let's go ahead and give you some terminology. There's home equity lines of credit (HELOCs), there's also home equity loans, and then there's private home improvement loans. And we want to kind of walk you through each of these. So both, if you look at the HELOCs and the

home equity loans are both secured by your home. The bank is going to want to basically attach to that. If you don't make your payments, you jeopardize your staying in the house. A lot of times, the private home improvement loans, they might just be essentially lines of credit. That's right, they're not going to be secured by the house, but that probably is going to come with a premium, so be aware of that. The home equity line of credit, they're going to tell you. The bank is going to give you a range. They're going to say, Hey, you're approved for this much expenditure, and you now have the ability to either write a check on it. In the past, you could even use debit cards on it, whereas the home equity loan from day one, they're going to give you a loan. They're going to basically give you a check, whereas the home equity line is access to that money. And then the private home equity improvement loans, it's also going to be a set amount, but what does

this mean for the rates on each of these products. Yeah, most often when you have a home equity line of credit, it's going to be a variable rate, so it's going to move with some index or standardized rate, oftentimes it's going to be the prime rate, and depending on your credit in the market environment, plus or minus some basis points. With a home equity loan, oftentimes you can get a set rate, it can be fixed for some finite period of time, and the same is true for private Improvement Home Loans. Now, as you can imagine, when you're investigating these at current market prices, the variable right variable rate might be a little bit lower than the fixed rate, but there's going to be some risk. If rates end up going up, your rat's going to adjust up. If rates go down, you'll get the benefit from that. So when it comes time to figure out which one of these loans makes the most sense, it's going to depend on a number of factors. How quickly are you going to pay it back? Do

you want a variable fixed rate, and do you have a definitive amount that you know you're going to spend. So once you've decided the type of product, the type of loan that you're going to use, then you want to figure out, Okay, what is it okay for me to use this for, and what is it not okay for me to use this for? And again, this is like a Captain Obvious statement. We love if you're going to use a home equity line of credit or a home equity loan or a private home improvement loan. We'd love for that to be for home improvements. That's kind of what they're designed for, for the principal residents that you're doing this improvement on. It's okay to borrow money against that because, in theory, you're going to pay it back, and that improvement that you're making to the home will cause the asset to become more valuable through time. I wouldn't think of it purely as an investment, but you can kind of get your mind wrapped around it as an investment. So for home

improvements. We think home equity lines are great to use. Yeah, I was going to make the point B also a lot of people I think 'cause we've put out some things that historically things are a little unique right now. CU interest rates are up. A lot of people might be watching this and be like, Why didn't they mention Cash out refinance? You know, I can get access. I could pay for my Improvement by going and refinancing my loan. Well, it's back to the point that I kind of started off this segment with. If the majority of you have mortgages that are less than 4%, this allows you to at least only have the higher rates that we're dealing with in the market on just the Improvement. Whereas if you go and refinance the entire loan balance just to get the Cash out refinance, you're now subjecting the entire amount of the loan to that higher rate. So that's why this is for primarily Home Improvements and you're trying to make the best of a pretty rough

situation and potentially with these variable products. If rates do come down, and we don't know, but if rates did come down, these products will reset automatically and start coming down in price as well. So, what do we not want you to use home equity lines for? Well, we don't want you to use it for lifestyle. Like, we don't want you to borrow money against the equity of home just to live a higher lifestyle because what you're doing is you're setting yourself up for not having long-term success. We also don't love using home equity lines for debt consolidation. There are other types of loans that, if you must, that you can use for debt consolidation because the problem is if you have some outside debts and maybe you have auto loan debt, and you have credit card debt, you have unsecured store debt, you have student loan debt, and fill in the blank, you have all of these types of debts. Well, all of a sudden, when you take out a home equity line to go pay off those debts, you've now taken some unencumbered debts.

and you've replaced it with encumbered debts, meaning that if you cannot make those payments, you could lose your home. So, we don't like you trading unsecured debt for secured debt; it puts you out further on the risk spectrum than you ultimately want to be. And we also don't love using home equity lines of credit for education to pay for student loan bills. There are other types of products that you can use that are a better fit to pay for education besides home equity lines. Well, this content will live for years to come, and I'm hopeful that the first three things you laid out—lifestyle, debt consolidation, education—I think a little perspective would help out if you looked at where prime is because a lot of home equity products are going to be tied to either PR Plus or PR Minus depending upon how important you are to your banking relationship. But you can see right now prime rates are at 8.5%, and when we did a little quick research, we found out that the typical home equity line product right now is a

little over 9% (9.17%) expensive money. So, I think a lot of people in this moment in time, they're probably thinking twice about definitely lifestyle debt consolidation and education. But this content will live, and there's going to come a time where, I don't know, where rates will settle down once they start dropping them, maybe around fiveish (5 and a half%). I still don't want you to fall into the trap of lifestyle debt consolidation. And I think Bo, you just said a key thing. If you were taking lifestyle choices and now jeopardizing the shelter that you actually are raising your family, what are you doing? And by the way, I can speak from my heart on this, is because I fell into this trap. When you see those periods where you know home equity line rates were Prime minus, and here's Prime sitting right around 3%, you can see how very quickly money gets cheap to borrow money and feel like you can buy cars, you can pay for lifestyle, but guys

that is a mirage. It's an assault on discipline, and you living on less than you make, and you need to really fight against that urge. All right, now are you ready for the money guy hot take? 'Cause this is the one that's going to get the stones thrown at us. This is the one where the trolls are going to come out. We also, when it comes to home equity lines of credit, we also don't love using those for real estate purchases. Now, I know that this is going to go against what hundreds of thousands of people out on the internet tell you, because the whole strategy is you buy a house, and you take out a home equity line, you buy another house, you take out another home, you buy another house, and you rinse and repeat and rinse and repeat. And while that can work, and people will tell you stories, what it's ultimately doing is it's pushing you further and further and further and further out on the risk spectrum. And if you're not actually paying down these

debts. If you're not actually decreasing your overall debt load, what you're doing is you're building a house of cards. And while that house of cards might stand, what you're worried about is when the music stops and they all come toppling down. And the very last one to fall is your primary residence, the one that was securing this pyramid that you built. I think if you don't have cash, the down payment, if you can't come up with that without borrowing more debt, then you might not be in the stage of your financial journey where it makes sense to begin your real estate empire. Well, we're also talking about your primary residence, of course. Yeah, absolutely. It's like all things that you see, all the social media, there's always a little ounce of truth in the stuff, but they skew it, they turn it into something it's not supposed to be. There will be a time in the future where interest rates are much lower, where there's nothing wrong if you have a rental piece of property that you go do.

a cash-out refinance and probably use that cash-out refinance potentially to leverage to expand your real estate investment empire. But notice I said you did this on a rental property. This is your primary residence. It's back to this is the house that you're raising your family. This is the shelter for your family. Don't jeopardize this stuff. Yes, you might get lucky. There's a lot of people in real estate that use home equity lines. But are you trying to be good by managing risk as you navigate this? Well, are you just counting on Lady Luck to be what makes you reach success? And that's the thing that I tell people. You got to understand the relationship of risk with this walk towards building abundance and wealth for the future. And that's why I don't like you jeopardizing that primary residence. So let's talk about what to consider before using a home equity line or borrowing against the equity in your primary. We've already said this is the renovation, is the home improvement for lifestyle, to build significant equity.

or is it for both? You know, lifestyle might be, Hey, I want to put a pool in. Okay, is there a reason that you're doing that? Does that make sense? Or is this something, say, Hey, we have unfinished storage, and if we finish the storage, not only will we be able to enjoy it more as a family, but this is also going to add to the value of the home. So, you to realistically assess, Are the improvements that I'm making going to meaningfully add value to this, or is it just going to be something that's going to make it more enjoyable for me and my use of it? Yeah, this is, I mean, look, this is a hard decision right now because interest rates are so high. So, I would challenge you if you, because there's nothing wrong, you know, in this moment in time, and maybe you've made the determination to enjoy this decade. We need to improve this house so that we can live our best life. But I would put that under the filter of Do this with the thought that how do I

get myself back on track to saving for retirement. And by being hard on yourself, be very regimented to say, Hey, if I'm going to do this improvement, I'm going to pay these higher rates in this marketplace right now. Can I pay this thing off in three years? Can I pay it off in five years? And if the answer, or maybe seven years, you come up with maybe it's ten years, I don't know, but be honest with yourself and create a plan and don't deviate from that plan because you are that incremental opportunity cost with every decision you make can be very expensive. I love it. How long will it take me to pay it back? And also, how long are you even going to be in the home? You do not want to do a major renovation if you're likely going to sell the home in six months, a year, two years. You want to make sure that if you're doing a renovation for you to enjoy, that you're going to be there long enough to actually enjoy it. And you want to

understand what's the timeline for me to pay this back.

Are HELOCs Officially the Best Option for Large Home Projects?

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Exploring Home Equity Options for Renovations

Home equity lines of credit (HELOCs) and home equity loans are common options for those without available resources for big expenses, especially in the current housing market.

Many homeowners with low mortgage rates are choosing to use their home equity for renovations instead of selling or resetting their loans.

The median spend on home renovations has increased by 60% from 2020 to 2023, with 23% of renovators seeking HELOCs or loans for major projects.

Understanding Home Equity Loans and Lines of Credit

Home equity loans and lines of credit are secured by your home, with the bank having the right to take action if payments are missed.

Home equity lines of credit offer variable rates and access to funds, while home equity loans provide a lump sum with a fixed or set rate.

Private home improvement loans may come with a premium and are not secured by the house, but they also offer a set amount for borrowing.

Home equity lines are beneficial for funding home improvements, especially when mortgage rates are low.

It's not advisable to use them for lifestyle upgrades, debt consolidation, or education expenses, as this can increase financial risk.

Home equity products are often tied to prime rates, which are currently at 8.

The Dangers of Lifestyle Debt and Home Equity Lines

Interest rates are currently high, leading many to reconsider lifestyle debt consolidation and education expenses.

The speaker warns against using home equity lines of credit for real estate purchases, as it can lead to increased risk and a growing debt load.

They emphasize the importance of living within one's means and accumulating cash for a down payment before building a real estate empire.

Considering a Cash-Out Refinance on Your Primary Residence

Using a cash-out refinance on a rental property can help expand a real estate investment empire, but it's risky to jeopardize your primary residence.

It's important to assess whether home improvements will add meaningful value or just enhance your family's enjoyment.

With high-interest rates, it's crucial to make thoughtful decisions about using home equity for renovations.

Getting Back on Track with Retirement Savings

Being regimented and honest with yourself is crucial for improving your financial situation.

Create a realistic plan to pay off expenses, considering different timelines.

It's important to assess how long you'll be in your home before making major renovations, ensuring you have enough time to enjoy the improvements.