When facing the potential problems that come with buying and selling a home at the same time, a lot of move-up buyers get stressed about their financial options. They believe that, in order to cover the down payment on their new home, they have to sell their current home first and get financial flexibility.
In many cases, however, this stress is unnecessary. Move-up buyers can sometimes qualify for short-term loans that will allow them to be financially flexible without sacrificing the security of their current home. One such option is a bridge loan, which we discussed on our recent blog.
Another common short-term loan option is a Home Equity Line of Credit — commonly called a HELOC for short. A HELOC, like the name implies, is a credit line that you can open against the equity that you have in your current home. Essentially, it is a type of second mortgage. Most people who qualify for a Home Equity Line of Credit can borrow up to around 80% of their home’s value (according to our amazing local lending partner, First Savings Mortgage).
One important thing to note about a HELOC is that it is not a singular, lump-sum loan. Instead, it is a line of credit that is guaranteed by your home. If it helps, you can think of a HELOC like a credit card, where the limit is determined by your current home value. (PS. Do you not know what your home is worth? Find out with our amazing Home Valuation Tool)!
This means that a Home Equity Line of Credit can be a great option for move-up Buyers who are looking for a flexible option for short-term financing.
Like always, however, it’s important to consider multiple options for your financing needs. Every home seller and home buyer has unique needs and means — and it’s especially important for move-up buyers to avoid mistakes by knowing these needs!
So let’s look at some important pros and cons of HELOC and compare them to bridge loans.
What are the advantages of a Home Equity Line of Credit?
When you borrow money via a Home Equity Line of Credit, you are only responsible for paying back what you borrow. Because a HELOC is a credit line and not just a lump sum, you have more flexibility and control over how much you borrow and what you use those funds for. For a lot of home owners and move-up buyers, this control can bring a huge sigh of relief.
Compared to a credit card or personal loan, HELOCs tend to have relatively low interest rates. While the exact rates depend on the lender’s policies and the home owner’s creditworthiness, current interest rates can be as low as 3%. Furthermore, most HELOC programs have a ‘draw’ period in which you only have to pay interest payments, rather than worrying about both interest and principle.
Because of these factors, Home Equity Lines of Credit can be financially wise options, depending on your personal situation.
(Potentially) Lower Credit Requirements:
Because bridge loans and other refinancing options often require you to qualify for several properties simultaneously, they often are aimed towards people with a very good credit score. HELOCs, on the other hand, are more accessible to those with lower (although still fair-good) scores. In part, this is because a HELOC is a line of credit, rather than a complete loan.
Because HELOCs can be less risky for a lender, you can sometimes qualify for a HELOC program even if your credit score is too low for other short-term financing options.
What are the disadvantages of a Home Equity Line of Credit?
Your home can be at risk
In a standard Home Equity Line of Credit plan, your property is collateral for the credit line. This means that — in the worst case — you could face home foreclosure if you are unable to pay your debts when the time comes. Obviously, this is not ideal for anyone and could create undue stress for a move-up buyer who is also trying to buy a new home.
It is vital that you fully read and understand the terms of a HELOC agreement before you sign it.
Although the interest rates on a Home Equity Line of Credit tend to be lower than personal financing options, they also are less stable. Unlike many home loans with fixed rates, HELOCs have variable rates. This means that your monthly payments can change based on fluctuating interest rates. HELOCs, therefore, can be bringing in a level of uncertainty in your finances rather than a stable monthly cost.
Many lenders will not let you open a Home Equity Line of Credit if your home is currently for sale. Additionally, you will usually have to pay off all outstanding debt on your HELOC once your home closes, if you already had a HELOC when putting your home on the market. This means that if you want to use a HELOC to finance your move-up buying strategy — instead of another finance option — you will have to plan out a strategy ahead of time.
Essentially, HELOCs can require a lot of forethought and strategy to optimize, especially for move-up buyers.
How to know if a Home Equity Line of Credit is right for me
As you can see, there are some clear pros and cons to opening up a Home Equity Line of Credit. They can be powerful tools for your financial flexibility, but they also can be risky if your situation changes and you are unable to keep up with your payments.
If this statement scares you, don’t worry — no one expects you to figure out all these things on your own! The best way to find out whether a HELOC is the best option for you is to speak with an expert!
When you come in to meet with one of the Keri Shull Team’s expert real estate analysts, we will walk you through your choices and help you find the one that’s best for you! Then, we will work with our amazing local partners to create a program that suits your needs — so you can stop stressing out and start getting excited to find and move-up to your dream home!
The amazing local specialists of the Keri Shull Team have the knowledge you need to find the right home. So no matter if you are living in Arlington VA, finding the hottest place to live in DC or any other neighborhood in the DMV, we can help!
We have experts standing by to help you with all your real estate needs, to book an appointment click here. Make sure to ask about our Move-Up Buyer Guarantee and learn how we will sell your home for FREE!
Disclaimer: The above content is intended for education only; it is not meant to be financial advice. For a personalized consultation of your financial options, please contact us at (703) 436-2191.