Bobby Kittleberger and his wife Danielle bought a house in Sandston, Virginia in 2020, but the house needed urgent work to rebuild a collapsing porch.
The couple consulted a financial advisor who suggested that taking out a home equity line of credit (HELOC) could give them quick access to the money they needed to make much-needed home improvements.
Interest was only 4 percent at the time, and the couple was able to open a line of credit worth more than $100,000 with local bank Bank of The James.
“We replaced the aft deck and used the rest to make a laundry room upstairs and build a walk-in closet for my wife,” Bobby, 35, told DailyMail.com.
And they are certainly not alone. Americans are increasingly taking advantage of their greatest source of wealth as a lifeline in times of need – by borrowing against the value of their property, which has skyrocketed since the pandemic.
Bobby Kittleberger and wife Danielle raised a HELOC worth more than $100,000 to pay for home improvements
According to analytics firm Black Knight, the U.S.’s “tappable equity” — the amount available to lend or borrow while maintaining a buffer of 20 percent equity — has risen 56 percent in three years to $9.3 trillion.
A HELOC provides an amount of money, similar to a credit card limit, that uses your home as collateral.
Unlike a home equity loan, a HELOC has a variable interest rate.
Some come with a prepayment, but homeowners only pay interest on the amount of credit they actually spend.
Mortgage rates have soared in recent months – and Americans are now facing the highest rates since 2002.
Data from government-backed lender Freddie Mac showed this week that a 30-year fixed-rate mortgage now hovers at 7.09 percent.
Lenders scarred by the financial crisis have typically been strict about HELOCs – considered relatively risky for banks because the line of credit is paid off after primary mortgage obligations.
But rising mortgage rates have made cash-out refinancing unattractive to most homeowners, making financial institutions more open to HELOCS.
“The phones of the Mortgage Refinance Department are not ringing. The way to get equity out of the house has gone to the HELOC,” Greg McBride, chief financial analyst at Bankrate, told me. Bloomberg.
Americans face their highest mortgage rates since 2002 as experts warn of higher borrowing, sending the real estate market to a screeching halt
In 2022, 1.41 million HELOCS were approved – 34 percent more than the previous year. According to credit reporting agency TransUnion, this was the highest total since 2008.
While it’s a way for people who’ve seen their home values rise to access cash, variable rates dictated by broader borrowing terms mean HELOCs are impacted by the Federal Reserve’s aggressive inflation-fighting rate hikes.
Last month the central bank raised the benchmark interest rate to between 5.25 and 5.5 percent – a range not seen since early 2001 – and expectations are rising that another hike is imminent in September.
When Bobby and Danielle, who run online publishing Guitar Chalk, had applied for their HELOC, it was based on the estimated value of their home, which was more than they paid for it. This meant that the line of credit was worth more than their equity in the house at the time.
The interest on the credit line was originally 4 percent, now it is more than 8 percent.
The Federal Reserve raised interest rates by a quarter of a percentage point, pushing benchmark borrowing costs to the highest level in more than two decades
“That was definitely a surprise to me and it was a bit of bad timing because we bought so low. I should have been a little smarter. Interest rates were historically low – of course they would rise,” he said.
“We are not using the money for the time being. We’ve paid it off and I think we’re going to wait until we’ve paid it all off, or wait until the price has dropped a bit.’
Despite this, he said he had few regrets about taking the credit as it helped him achieve what he needed at the time.
“You have to make do with the floating rate or avoid the loan altogether,” he said.
While some Americans use HELOCs as a source of emergency cash, others use them for more lavish purchases.
Marketing manager Raychel Kolen, 42, opened a HELOC with her husband to finance the purchase of some land in Baja, Mexico, after falling in love with the place over a series of vacations.
The couple, from the Pacific Northwest, considered taking out a loan from a relative, but ultimately decided that opening a HELOC with their home, which they purchased in 2018, was probably the best option.
Marketing manager Raychel Kolen opened a HELOC with her husband to finance the purchase of some land in Baja, Mexico
The house had come with the first right of purchase on four acres next to the house, and the couple had bought the land to avoid being snapped up by developers.
After a local credit union approved their HELOC, the couple used the money to buy the land in Mexico.
Before long, they were able to sell the four acres in the US to private buyers – and use the proceeds to pay off the HELOC.
Despite it paying off, Raychel and her husband keep the HELOC open in case they need it. To do this, they only need to keep $5 in a checking account at the credit union.
“I feel like the HELOC gives us peace of mind knowing we have this additional source of funding if we need it,” she said.