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HELOC vs. Personal Loan: Which is Right For You?

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Mar 11, 2023

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Table of Contents

I. Record High Tappable Equity
II. Investing in Homes with HELOCs
III. The Pros and Cons of a Personal Loan
IV. Inflation - Your Friend or Foe
V. Supply and Demand for Homes

I. Record High Tappable Equity

How much real wealth have you created over the years by owning one or more properties? If you were fortunate to own a home, duplex, triplex, or fourplex at any point over the past five, 10, or 20 years, the odds are quite good that your home doubled or tripled in value.

During the previous housing market peak back in 2007, the estimated equity in homes nationwide was about $15 trillion while mortgage debt was listed at $9 trillion, according to Real Investment Advice. In 2022, the equity in homes reached a staggering $30 trillion and doubled in size while total mortgage debt increased at a much slower pace to hit $12 trillion. More wealth was created between 2007 and 2022 in real estate holdings than any other asset class.

During the first quarter of 2022, the total collective amount of equity money that homeowners across the nation could pull out of their homes while still retaining at least 20% equity rose by a whopping $1.2 trillion, according to Black Knight. This equity increase was just in three months!

The year-over-year increase in tappable equity, or the equity money that homeowners could borrow up to 80% of the value of their home, in April 2022 jumped 34% in just one year. This national home equity increase was equal to about $2.8 trillion dollars in new gains for homeowners in 12 months. The average estimated tappable equity amount available was calculated to be $207,000 per homeowner as of the second quarter in 2022.

Rising Credit Card Debts and Fees

By the third quarter of 2022, the average American household owed $8,942 in unpaid credit card debt as per WalletHub. Let’s take a look at the Top 10 states with the highest average credit card balances per household:

1. Alaska: $11,277
2. Hawai’i: $10,190
3. Virginia: $9,176
4. Maryland: $9,120
5. Connecticut: $9,088
6. New Jersey: $8,956
7. Colorado: $8,906
8. Georgia: $8,699
9. Texas: $8,681
10. Utah: $8,527

Consumers who just pay the minimum payment on a credit card with balances near the national average will need more than 30 years to pay off the debt in full. Many credit card rates are more than double or triple what a home equity line of credit rate is today, so you’re much likelier to pay off the debt in a much shorter period of time with a HELOC.

To learn how much money you could get from a HELOC, click here!

II. Investing in Homes with HELOCs

A home equity line of credit (HELOC) is generally much easier to qualify for than other types of personal or business loans. This is partly due to the fact that the loan is secured by the owner’s home. Lower FICO credit scores may also be allowed as compared to unsecured personal loans or other types of consumer loans due to the collateral protection for the lender.

These revolving credit lines can be kept at zero balances or you can borrow money as needed while having the option to pay it back as long as 30 years later. These longer loan payment terms usually make the monthly payments much lower than other types of consumer loans.

It’s much better to let your money work for you than for you to work hard for your money at your job for 40 or 50 hours per week. One of the best investments that homeowners have made over the years was remodeling their home by way of adding an updated kitchen, bathroom, swimming pool, or increasing the square footage size of their home. With a $25,000, $50,000, or $100,000 investment into their home upgrades by way of a digital Hitch HELOC, their cash-on-cash return might be two, three, or four times the capital improvements as the home value jumps by $100,000 to $300,000+.

Between 2012 and 2022, home prices jumped by more than 7 to 10% per year in many regions. To simplify, a home that was valued at $500,000 back in 2012 may have increased in price by $50,000 (10% of $500,000) per year while compounding and snowballing in growth as the value and gain grew together in magnitude. If we use the Rule of 72 investment formula to show how soon it will take for an asset to double in size by dividing the annual return by 72, a home that increased by 7.2% each year would double in value in 10 years (72 / 7.2 = 10 years).

Your daily equity gain for a home that grew in value by $50,000 in just one year is equal to a gain of $136.98 per day. If you borrowed $20,000 to make upgrades to your home which increased the property value by at least $50,000 without even factoring in any inflation or appreciation gains, it would likely cost you a very small fraction of the $136.98 gains each day. This shows the power of letting your money work hard for you!

Home Equity Line Of Credit

Other benefits of HELOC loans are as follows:

  • You may qualify for much larger loan amounts at relatively high loan-to-value (LTV) ranges
  • You only pay interest on the funds borrowed (you pick how much you borrow!)
  • Lower monthly payments during the initial draw period
  • Interest payments may be tax-deductible if used for home improvements
III. The Pros and Cons of Personal Loans

Personal loans are types of loans that aren’t secured by real estate collateral such as your home. As a result, these loans tend to be more expensive for borrowers with very high rates and fees. Many personal loan lenders offer these funds for much shorter periods of time than HELOCs for cash-out mortgage loans that may range from one to five years.

Personal loans can be for as little as $100 up to $10,000 or more. Many times, they’re the “emergency cash cushion loan” that a borrower seeks to cover their latest monthly rent payment or skyrocketing utility bill that recently doubled or tripled in size. For borrower applicants who’ve been late on their debt payments, their declining FICO credit scores will likely make the interest rates for unsecured personal loans reach the double-digits of 10% or more. It’s actually not unheard for some unsecured personal loan interest rates to be as expensive as 200% or higher. If so, it would be incredibly challenging to pay this debt off in the near future.

A consumer who does not own real estate is more likely to become a borrower applicant for a personal loan. However, a personal loan can also be secured against an older free-and-clear automobile, boat, or against business equipment. Let’s review some of the personal loan options that may or may not be secured by any collateral:

  • Secured personal loans: The loan may be secured against a vehicle, business equipment, jewelry like a gold watch or diamond ring, or some type of a bridge loan secured by multiple assets. If you don’t pay back the loan on time, then the lender has the legal right to take the collateral away from you such as your car. These types of loans are often found at pawn shops.

  • Unsecured personal loans: These rates can average somewhere between 20% and 200%, depending upon the creditworthiness of the borrower. When you absolutely need the money today or by tomorrow, these pricey loans may be the fastest option for borrowers in need.

  • Debt consolidation loans: These types of loans offered by banks, credit unions, finance companies, online lenders, and even pawn shops can get you a lump sum to pay off two or more types of debt like an unpaid car loan, student loan, or credit card balance. This way, all of your debt is rolled into just one lump sum monthly payment.

If you need money now and don’t have much collateral to offer to the lender, then an unsecured personal loan may be your best choice. However, the rates, fees, and monthly payments that you’ll have to pay will probably be much higher than a secured HELOC or second mortgage.

IV. Inflation - Your Friend or Foe

Inflation can either be your friend and boost your wealth or your foe or enemy while damaging your wealth. The choice is yours how you decide whether inflation helps or hurts you partly by your investment choices.

Real estate has proven to be an exceptional hedge for inflation as homes generally rise at least in value at or above the published annual inflation rates. This has proven to be true for the past several decades. Some of the wealthiest people today were able to take their gains from one home and roll or reinvest it into multiple properties while inflation worked hard for them to increase wealth. To better visualize how inflation can severely destroy the purchasing power of the dollar in your pocket, let’s review how far in value $1 million dollars in savings erodes over time due to various inflation rates after 25 years:

  • Is equal to $539,390.59 at a 2.5% inflation
  • Is equal to $477,605.57 at 3% inflation
  • Is equal to $375,116.80 at 4% inflation
  • Is equal to $295,302.77 at 5% inflation
  • Is equal to $232,998.63 at 6% inflation
  • Is equal to $184,249.18 at 7% inflation
  • Is equal to $146,017.90 at 8% inflation

Inflation has been 8% + in the recent months.

V. Supply and Demand for Homes

The field of economics teaches us that the supply and demand balance for any type of consumer goods or assets like homes is what drives current prices either up, down, or neutral. When the supply is lower than historical norms, the price tends to be high. Conversely, a high supply of something offered for sale to the general public will usually fall in value or price. This is especially true for home prices.

law-of-supply-and-demand.jpg

Homeownership Trends Let’s review some homeownership numbers across the nation as per the US Census Bureau and Statista from 2022:

  • The national homeownership rate is almost 65%.
  • There are 79 million owner-occupied homes in the US as per Statista.
  • An estimated 65% of homes are owner-occupied and 35% are leased or vacant.
  • Home prices have jumped 73% nationwide since 2000.
  • Approximately one-third (33%) of all home buyers are first-time buyers.

Since 2007, the supply of newly constructed homes has been well below historical averages. As a result, there aren’t enough new homes across the nation to keep up with buyer demand. As many of you have seen firsthand, the few homes listings near you over the past several years likely received multiple bid price offers at or above the home listing price. In some hot market regions, it wasn’t unusual to see 10, 20, 30, or 50+ purchase offers for the same home.

There are fewer sellers in many regions these days because they don’t want to lose their current low mortgage rates that may be in the 2%, 3%, or 4% rate range. Upwards of 80% of home mortgage loans as of July 2022 had rates at or below 4%, as per CoreLogic. Many of these homeowners don’t want to lose these rates that are near all-time record lows and later qualify for a new mortgage loan rate that may be double or triple what they have now. As a result, home listing inventories still remain low.

Days on Market for Home Listings

The Days on Market (DOM) data for local, state, or national regions is something that many of you can quickly review to get a better idea how strong or weak the current housing market is at present. Days on Market shows us how long it takes a listed home to actually sell to a new buyer. For example, let’s review the Days on Market data for the past several years as provided by the St. Louis Fed:

days_table.PNG

As you can clearly see, the supply of available listings and Days on Market trends are still below historical trends which can keep your home equity gains solid for many years to come.

You need to remain in control of your finances. You’re the person who can best protect you and your household more than anyone else.

To see how much the equity in your home is worth, click here!

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Equal Housing Lender
Hitch, Inc. 23833672158 NW Toussaint Drive. Bend, Oregon 97703

1. Qualified applicants may borrow up to 95% of their home’s value. This does not apply to investment properties.2. HELOCs have a 10-year draw period. During the draw period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) the total of all accrued finance charges and other charges for the monthly billing cycle. During the draw period, the monthly minimum payments may not reduce the outstanding principal balance. During the repayment period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) 1/240th of the outstanding balance at the end of the draw period, plus all accrued finance charges and other fees, charges, and costs.The lender will calculate this amount by taking the outstanding Account Balance on the last day of the draw period and dividing it by 240 months and then adding any finance charge that accrues but remains unpaid during the monthly billing cycle plus any other fees, charges and costs to the fixed principal payment that is due. During the repayment period, the monthly minimum payments may not, to the extent permitted by law, fully repay the principal balance outstanding on the HELOC. At the end of the repayment period, the borrower must pay any remaining outstanding balance in one full payment.3. The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Most borrowers get their cash on average in 21 days. The time period calculation to get cash is based on the first 4 months of 2024 loan funding's, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications. Closing costs can vary from 3.0 - 5.0%. An appraisal may be required to be completed on the property in some instances.4. Not all borrowers will meet the requirements necessary to qualify. Rates and terms are subject to change based on market conditions and borrower eligibility. This offer is subject to verification of borrower qualifications, property evaluations, income verification and credit approval. This is not a commitment to lend.5. The content provided is presented for information purposes only. This is not a The content provided is presented for information purposes only. This is not a commitment to lend or extend credit. Information and/or dates are subject to change without notice. All loans are subject to credit approval. Other restrictions may apply.