You Need A Home Equity Loan – Even Though You Don’t . . .
Sound confusing, then we have your attention, and this discussion is worth the time. In our industry we work with all types of buyers and even though you are not a buyer today, believe it or not, you might be tomorrow depending on life’s circumstances.
We see this often, an out of the blue call from a past client who has just seen their ideal home and is beyond confident that they have the financial capacity to buy another property prior to selling their existing property. While they do have the capacity, it is not necessarily without assembling some complex temporary financing or selling a part of their portfolio. Consulting with their financial advisor, lender, Realtor, and CPA all take time. By then, the property has several other suitors who are all cash or have fully approved loans in place.
You have worked hard, saved, and invested smartly. You have the purchasing capacity, but do you have immediate access to cash? Very often, our clients are overly confident they can buy what they want when they want, until such time they realize that accessing their wealth is a process and can have repercussions that then make them step back and hesitate.
In the past, the strategy for such an event was to take out a “Bridge Loan”. A Bridge Loan is funding that allows you access to immediate cash until such time that you can liquidate your stocks or sell your primary home. It is a second loan on top of your primary mortgage and is typically difficult to qualify for and comes with higher loan fees. The reason the fees, and sometimes rates, are higher is because the loan is higher risk since it is on top of your primary first home mortgage. Additionally, it is a short-term loan, so the lender will only be collecting interest for a brief period.
Consider the Home Equity Loan, or as it’s known in the lending industry, the HELOC (Home Equity Line of Credit). For most of us, this is a loan we use after buying a home to help us combine credit card debt, pay off a car loan, or make some home improvements. It has been a program for Americans to consolidate debt and clean house, financially speaking, while hopefully being able to write off the interest expense. When lenders sell the product to you, they also suggest that it is a line of credit that you can keep open even if you aren’t using it. It is there for you in case of a family emergency or a financial crisis.
Today, if you have an existing HELOC, it is also ideal for a spontaneous bridge loan and everything about it is better than getting a Bridge Loan. First, you don’t have to use it, it is just sitting there waiting for you to access the money. Second, the interest rate is low. The only question is – have you updated your line, and does it truly reflect all the equity you would like access to?
The reason we recommend you put a HELOC on your home is that for immediate access to cash, you simply write the check from the HELOC account without a phone call or diving into your IRA or 401K.
You may not be in the market to buy a home today, or necessarily even planning to be, but we meet with spontaneous clients every day who tell us, “This morning I was running to Home Depot and I saw this open house and here I am writing up an offer! This is crazy”. In 2015, that wasn’t a problem, but in 2021, we see multiple offers and often up to 25% of the 8 to 16 offers are cash. Homes sell quickly. If you have a HELOC in place, you can transfer the cash to your checking account the day you write the offer and show proof of funds. While you may never need it, the fact is that most of our clients cannot believe they don’t have instant access to their money, nor do they believe that there will be multiple cash offers, but this is what we are seeing. Those clients then look to get a HELOC in place on their home only to learn that it will take 30 to 60 days to get the financing and that they must sign documents stipulating that they cannot list their home for sale. Lenders see a HELOC as a long-term security on your home and base their lending decisions on intent for a homeowner to occupy the property. It is not a Bridge Loan. So, the next step is to get the Bridge loan, but that takes time and costs more money. In most cases, buyers today don’t have that time because before they know it, the home is gone. That is why having a HELOC in place now can be the difference maker in submitting a winning offer in the future.
Due to the uniqueness of lending requirements for each situation, it is best to have a discussion with your lender and trusted financial advisor before you make any decisions. If you would like to learn from an expert, your ELEETE agent can connect you to a variety of preferred lenders who can guide and educate you about the process. Additionally, you can call your financial advisor, banker, mortgage lender, or ELEETE’s trusted colleague Brian Page at Guild Mortgage (503-452-0001). Brian has been ELEETE’s #1 resource since we opened our doors, and he is an educator. He is all about guiding and consulting and is a fabulous resource if you want to get a program in place for the future.