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The Pros and Cons of a HELOC: Unlocking the Value of Your Home


Feb 2, 2023



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A HELOC (Home Equity Line of Credit) is a type of loan that allows you to use the equity in your home as collateral to secure a line of credit. It's like a credit card, in that you can borrow up to a certain amount of money and pay it back over time. The interest rate is usually adjustable, and you only pay interest on the amount of money you've borrowed. HELOCs are often used for home improvements, debt consolidation, and other large expenses .

The HELOC Safety Net

The average American family derives the bulk of their net worth from the equity in their primary residence. For the typical homeowner near retirement age, an estimated 83% of their overall net worth is tied up in their home equity. As a result, these same homeowners only have access to approximately 17% of their net worth for monthly expenses. Unlike physical cash or a credit card, we can’t take our promissory note or deed to our home to the grocery store to fill up our cart with food and other supplies.

In May 2021, the Federal Reserve released its annual report entitled Economic Well-Being of U.S. Households in 2021 about the state of a household’s financial well-being. These annual reports have been published dating back to 2013 while using a theoretical $400 emergency expense. The Fed’s report was focused more so on what percentage of surveyed households had a minimum of $400 cash on hand to cover emergency expenses. As the purchasing power of the dollar continues to fall and inflation skyrockets, consumers’ average emergency expenses were closer to $1,400 in 2021 and are probably much higher here in 2023.

Technology has changed the way we live our lives here in the 21st century. With shorter attention spans these days and the need for almost immediate responses with the click of a smartphone button, the digital HELOC offered by Hitch is your best financial solution.

Hitch has leveraged and combined advanced technology, the online loan application process, and access to capital for our clients so that it’s more simple and at a faster application and approval pace. To learn more details about the Hitch digital HELOC, please watch this brief video: Hitch digital HELOC You can visualize a HELOC (Home Equity Line of Credit) as akin to a figurative safety net that’s somewhat akin to our financial cushion to help us cover rising known or unforeseen expenses, especially when our income is falling. As we’ve all seen firsthand in recent years, the declining purchasing power of our dollar isn’t allowing us to purchase as many goods and services while prices skyrocket. How many of us have seen our monthly utility bills for electricity, phone, cable, streaming services, gas, and internet access double or triple?

Most people don’t have friends or family who are willing to give them or lend to them any significant amounts of money to pay for these rising costs. If and when we run out of cash as homeowners, many of us are faced with a few potential solutions to pay all of our monthly bills. These common short-term financial solutions to access cash include:

  • Borrowing from our credit cards and paying double-digit rates
  • Cashing out our pensions and paying early tax withdrawal penalties
  • Selling our home and moving to a rental property

An estimated 33% of homes nationwide are held as free-and-clear with no mortgage debt. For 2021, let’s review published data provided by the U.S. Census Bureau and other sources as it relates to states or regions with the highest and lowest shares of free-and-clear residential properties:

  • Texas: 2.9 million properties
  • Florida: 2.5 million
  • California: 2.4 million
  • New York: 1.7 million
  • Pennsylvania: 1.5 million

The states with the largest percentage share of free-and-clear homes in 2021 were as follows:

    1. West Virginia: 53%
    1. Mississippi: 51%
    1. North Dakota: 47%
    1. New Mexico: 47%
    1. Louisiana: 46%

Surprisingly, Texas and Florida were both listed equally as having 43% of homes statewide that were held with no mortgage debt. Now, let’s review the states or regions that had the lowest share of free-and-clear homes back in 2021: Washington DC: 24% Maryland: 28% Colorado: 30% Utah: 30% In spite of these four regions above having the lowest percentage of residential properties with no mortgage debt, they’re also some of the priciest regions in the nation with a high number of homes valued within the $500,000 to $1,000,000 price range. As a result, the total dollar amount of homeowner equity is probably much higher than other properties with or without any mortgage debt.

Rising Home Carrying Costs

Homeowners still have monthly carrying costs for their free-and-clear properties that may include property tax, homeowners association, insurance, maintenance, utilities, gardening or landscaping, and contractor or subcontractor bills for upgrades or remodels, if applicable. As per data published by the US Census that tracks monthly expenses incurred by homeowners for their properties with or without mortgage debt, they found that the priciest states for homeowners with free-and-clear properties which had no mortgage payment obligations still had these average monthly expenses:

  • New Jersey: $1,081/mo.
  • Connecticut: $926/mo.
  • Massachusetts: $871/mo.
  • New Hampshire: $860/mo.
  • New York: $813/mo.

These same five states also tend to have some of the largest property tax bill assessments in the nation as shown in the list below:

Top 10 Highest Property Tax Rate Percentages

    1. New Jersey: 2.47%
    1. Illinois: 2.24%
    1. Connecticut: 2.13%
    1. New Hampshire: 2.13%
    1. Vermont: 1.9%
    1. Wisconsin: 1.78%
    1. Texas: 1.75%
    1. New York: 1.72%
    1. Nebraska: 1.68%
    1. Rhode Island: 1.57%

Now, let’s take a closer look at the percentage of our household income which may go towards our property tax payments. Shockingly, the average New Jersey household pays almost 10% of their monthly income for just property taxes alone. Here’s a list of the priciest property tax states as a percentage of household income below:

Top 10 Household Income Percentages for Property Taxes

    1. New Jersey: 9.96%
    1. New York: 7.86%
    1. Connecticut: 7.47%
    1. New Hampshire: 7.44%
    1. Vermont: 6.92%
    1. Illinois: 6.62%
    1. Rhode Island: 6.18%
    1. Massachusetts: 5.73%
    1. Wisconsin: 5.32%
    1. Texas: 5.14%

Source: HomeAdvisor

The states with the lowest monthly carrying costs for residential properties without a mortgage payment in 2021 were as follows:

  • West Virginia: $338/mo.
  • Mississippi: $356/mo.
  • Arkansas: $372/mo.
  • Louisiana: $372/mo.
  • Alabama: $379/mo.

Texas was ranked at #18 with average $567 per month payments for free-and-clear homes and Florida was ranked at #21 with $548 monthly payments.

Lien and Foreclosure Risks

The monthly or annual payment obligation for a free-and-clear property that is most likely our highest bill each year is the property tax payment. This is also the most important debt that you must not ignore because the local county tax assessor’s office can later foreclose on our home while a homeowner can lose all of their hard-earned equity as well as must find a new place to live. Another bill to pay in full is any work provided by a contractor or one of their subcontractors for maintenance repairs or full remodels of our homes. Many times, a homeowner will end up with much higher bills for repairs that weren’t originally budgeted or included within the original contract. If so, the dispute over the full payment of a submitted work invoice can later turn into a lawsuit and a filed mechanic’s lien against our home. At a later date, this recorded mechanic’s lien for unpaid contractor work can evolve into a foreclosure action against us whether or not our home is free-and-clear at the time.

Courts don’t differentiate much between a recorded mortgage lien, a mechanic’s lien, or a property tax lien during a foreclosure filing process. However, a property tax lien or an unpaid IRS or state tax lien generally will take first position on title when we’re selling the home on our home or when the nearby foreclosure auctioneer is selling the property to a new investor. A debt in first position is the first to get paid off. Any other debts subordinate to the first lien in second, third, fourth, or fifth lien position will get paid off if there’s enough money available from the sales proceeds.

There are many examples across the nation about unpaid property taxes, trash collection services, homeowners association (HOA) or relatively minor repair work in amounts of just $100 to $1,000 that later went to foreclosure at some point after the liens were recorded. As a result, the property owner lost their home and all of their equity at the same time because they did not have enough access to cash at the time to pay these small bills.

Many of us live within homeowners associations (HOA) across the nation. In fact, upwards of 27.5 million residential properties (detached and attached single-family homes, condominiums, and townhomes) nationwide are part of one or more HOA communities. This is especially true within the Sun Belt states that stretch from Florida to California while including numerous states in the South and Southeast like Virginia, Tennessee, Georgia, and Alabama and expanding westward to Texas, Arizona, Nevada, New Mexico, and into a few mountain states like Utah and Colorado. Some HOA residents may pay two or more separate HOA bills for common area maintenance, golf course fees, or special annual assessments for road work. If we miss the payments for the monthly, annual, or special assessment bills for HOA fees, many homeowners associations are quite aggressive and will assess significant fines and additional legal penalties that can cause us to later lose the home in foreclosure.

Expense Payoffs and Investment Opportunities

First off, we should write down clear financial goals as it pertains to the use of these funds before you apply for a HELOC. How will you use these HELOC funds and what is your detailed plan to pay them back? The safety net that a HELOC provides for homeowners is enhanced because they only pay interest on the funds borrowed as needed.

Some months, we may maintain a zero balance while other times we may need funds to pay off credit card bills that have exceeded 20% to 25% annual rates and fees. It can take more than 30 years to pay off a credit card debt if we just pay the monthly minimum due payment. As much as we may complain about rising mortgage rates over the past year, they are still a relatively small fraction as compared with today’s credit card rates and fees that are near all-time record highs. HELOC funds can be used to pay off consumer debt and to invest in other income-producing assets while increasing our overall net worth at the same time. For example, let’s take a closer look at the many different potential use options for HELOC funds: Pay off consumer debts (credit cards and automobile, school, and business loans) Adding a new kitchen or bathroom to our home while increasing property value. Investing in stocks, bonds, commodities, or cryptocurrencies Starting a new business or expanding our existing business. Applying these funds towards pension contributions. The interest paid on the HELOC may be tax-deductible if used for home improvements (please seek advice from a tax professional). The efficient use of the HELOC payments may boost our credit scores. Gifting funds towards a family member’s down payment for their own home. Purchasing other properties nearby as a 2nd or rental home. Some homeowners pull funds from the HELOC prior to purchasing a nearby discounted property that they fix up and flip for profits. Each time, the homeowner receives their net gains from another real estate, stock, or other type of investment, the profits can be applied towards paying down the HELOC or another other loan or adding to the homeowner’s saving accounts.

Potential Disadvantages of a HELOC

There can be positives and negatives associated with any decision that we make in life. This is especially true for financial decisions. The primary goal for many of us is to create enough monthly household income to cover our monthly expenses while boosting our overall net worth simultaneously. As noted earlier, the odds are quite high that the bulk of a homeowner’s net worth is directly related to the equity within the primary owner-occupied residence.

Let’s review some potential HELOC disadvantages:

Variable interest rate:

Rates can rise and fall as we’ve seen over the years. While both short-term and long-term rates are still below historical average trends over the past 50+ years, they have been rising since early 2021. Rising rates can lead to increasing monthly payments. The pricing for a HELOC is usually a floating or adjustable index that’s tied to something like the Prime Rate as published in the Wall Street Journal plus a margin. For comparison purposes, the Prime Rate reached a peak high of 21.5% in December 1980 while the Prime Rate in early January 2023 was 7.5%.

Shorter-term loans:

Many lenders offer loans in first or second lien position for shorter periods of time that may vary from one year to 15 years for a HELOC or a fixed-rate loan. If so, this can be much riskier for the borrower to have such a short due date to repay the date. Here at Hitch, we offer HELOC loans with terms up to 30 years (10-year interest only draw period with a 20-year fully amortizing repayment period after the draw term) which are much safer and affordable for our clients.

Pulling out too much money during the draw period:

Sometimes, homeowners may pull out too much money shortly after closing their HELOC loan. The excitement of access to cash may be a bit overwhelming for some enthusiastic homeowners who choose to take their dream vacation, buy a fancy car, or go on a shopping spree at the nearby mall. This is why it’s so important to write down how to most effectively use your HELOC funds before applying for a loan. With written financial plans in hand, we’re more likely to eliminate our consumer debt while building our net worth at a faster growth pace.

Alternatives to a HELOC

Many of us have one or more other options for cash besides a HELOC. Some of these lending options may be attractive while others may be incredibly costly by comparison. Let’s review some alternative lending options:

  • A cash-out first mortgage with a loan-to-value range somewhere between 50% to 80% loan-to-value.
  • A private money first or second mortgage as a consumer loan.
  • A business-purpose loan where the proceeds must be used primarily for the property owner’s business.
  • An unsecured personal loan from an individual or hard-money type of lender.
  • A reverse mortgage if one of the owner-occupants is over the age of 62. In almost every alternative lending option, the total overall costs are much higher than a HELOC. Additionally, the risk for the borrower can be much greater than if they had selected a HELOC.

Discover a Frictionless HELOC with Hitch

“Time is money” as the old saying goes in more ways than one. Time is also described as the most valuable commodity of them all. However, the bulk of a person’s true net worth likely originates from their home equity because time doesn’t pay our bills.

For many of us, the loan application process with other lenders can be quite challenging, sluggish, and stressful. With a Hitch digital HELOC application, we will do our absolute best to make the application process easy, seamless, and very timely for you. Once our Hitch team generates the HELOC approval, we’ll work closely together to get you access to cash as soon as possible.

To get started on unlocking the value of your home, please click on our loan application link: Digital Hitch HELOC Loan Application

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Equal Housing Lender

Hitch, Inc. NMLS #2383367 #2383367

2158 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 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.