It’s hard to imagine anyone in St. Cloud who hasn’t been hearing worried Wall Street commentators discussing the latest news. Starting with the worst January performance on record, even people without a lot of affected investments are aware of how ripples from that part of the finance world tend to reach almost everyone’s doorsteps.
St. Cloud homeowners can feel at least partially insulated—at least to the extent that the value of their homes constitutes a ‘real’ investment in ‘real’ property. That remains one of the principal attractions of owning your home. If a high-flying tech stock falls off the end of the world, investors can be left with a piece of paper and little else. They can’t live in it (and passing it on to their kids wouldn’t mean much).
The major investment drawback to home ownership is that it lacks liquidity. If you want to turn the investment into cash, it takes time to find a buyer—a lot more time than calling up your stock broker and telling him to sell. But that is such a universal need, there are several ways to solve it.
One increasingly popular ‘fix’ for the liquidity problem is the HELOC—the Home Equity Line of Credit. Using a local residence as collateral, a St. Cloud HELOC is a flexible way to free part of the underlying value of the investment without losing access to the home. After such a line of credit is established which reflects a portion of the net value of the property, the homeowner has the option of drawing on that account whenever he or she wishes. The amount used becomes an interest-bearing loan, to be repaid under the terms of the line of credit.
The popularity of HELOCs in St. Cloud has much to do with its built-in flexibility. The Wall Street Journal points out that, as housing prices continue to creep upward, “high-end homeowners looking for something bigger and better may find it cheaper to renovate than to relocate.” A HELOC is made-to-order for just such a purpose, because individual withdrawals can be made to coincide with expenses as they are encountered. In that way, a St. Cloud HELOC can prove considerably less costly than a traditional second mortgage, where interest builds up on the entire loan amount whether or not it is spent at once.
HELOCs may be offered on an adjustable interest rate basis, which usually comes in at a lower rate than for comparable fixed rate second mortgages. There can be some difference in the way the rate is calculated. HELOC rates are typically pegged to the Federal Reserve’s short-term rate, whereas mortgage rates tend to reflect 10-year Treasury note yields (the short-term rates rise more quickly).
Some banks report that demand for HELOCs has grown 25% to 30% for each of the past two years—even though credit requirements have risen, as well. Every lender has its own guidelines, but the industry standard is a maximum of 85% of loan-to-appraised-value (and at least a 640 credit score). Another positive note is that there is general industry agreement that those tapping their home’s equity via today’s HELOCs tend to do so more cautiously than heretofore. Considering that the interest on up to $100,000 of a home-equity loan can be considered tax deductible, it can provide considerable financial flexibility.
I make sure all my clients are aware of the many options that can go into planning their smartest real estate strategy. Please feel free to call me anytime to discuss your own plans!