Unlocking Equity: Exploring HELOCs

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In this episode, Drew chats once again with David O'Leary, Vice President of Residential Lending at AmeriServ Financial Bank, about home equity lines of credit (HELOC). What is a HELOC? What are the benefits of a HELOC over other credit lines such as credit cards? What can I do with a HELOC? Drew and Dave cover these questions and more!

AmeriServ's Website:
https://www.ameriserv.com/

Credits:
An AmeriServ Financial, Inc. Production 
Music by Rattlesnake, Millo, and Andrey Kalitkin
Hosted by Drew Thomas

Thanks for listening! You can find out more about AmeriServ by visiting ameriserv.com. You can also find us on Facebook, Instagram, and Twitter.

DISCLAIMER
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts, with the goal of helping to take some of the mystery out of financial and related topics; as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast, and any resources available for download from our website or other resources relating to Bank Chats is not intended, and should not be understood or interpreted to be, financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation. AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial, Incorporated.

Transcript

Drew Thomas  0:01  

Fast fact, though home-based lending has been around since the 1930s, home equity lines of credit did not become popular until about 40 years ago. Between 1982 and 1988, the total value of outstanding home equity loans grew from $1 billion to $188 billion. I'm Drew Thomas, and you're listening to Bank Chats.

Drew Thomas  0:43  

So, welcome to yet another episode of AmeriServ Presents: Bank Chats. I am your host, Drew Thomas with me my part time cohost, full time editor and production manager, Jeff Matevish. Hello. And we'll introduce our guest in a second because we're going to talk about...

Drew Thomas  1:01  

We, we, I can, I can, I can kid with our guest by the way because he was actually our very first guest on the podcast, our very first guest. This is going to be Dave O'Leary returns, Dave O'Leary returns.

Jeff Matevish  1:12  

By popular demand.

Drew Thomas  1:16  

Well, there were demands, but I don't know if they were popular.

Dave O'Leary  1:19  

They were made on me.

Drew Thomas  1:21  

So, we're going to talk home equity loans today. And so just briefly, since you already spoke up, let's go ahead and tell people just refresh people about who you are and what you do.

Dave O'Leary  1:32  

My name is David O'Leary, I'm the Vice President of Residential Lending, which is typically more involved with what is considered, and I'm air quoting here, mortgage loans. Previous to that I was in the consumer lending department. I was involved day to day in home equity loans.

Drew Thomas  1:49  

Yeah, so home equity loans. I mean, you I started looking up some statistics on home equity loans, and we live in an area just, you know, full disclosure, where we record and where we live is, traditionally speaking, I would argue less affluent in terms of home values and things like that than the typical home value across the United States, right? Yeah. So, if you live in LA, or Chicago, or Miami, or some of these places, you know, your average home value is probably $300,000-$400,000 were around here, it's not usually that high. But we're going to talk about how HELOCs tie into home values and things like that. But the average home equity loan or line of credit balance is about $25,000-$26,000 right now, as of the end of 2023. And the average credit limit per account is somewhere around $70,000. So, we're going to talk a little bit about what that means, how you find equity in your home, whether or not you should take out a loan against the equity in your home, and what the difference between is between a loan and a line of credit. So, let's start there. When we talk about home equity lending, right, people say home equity loan, they say HELOC as a shorthand. But really a HELOC is different than a home equity loan. Right?

Dave O'Leary  3:02  

Correct. HELOC stands for home equity line of credit. And the last part is the part that you need to concentrate on because the line of credit means your loan or a line of credit acts as a credit card. You can draw on it, you can pay it back down. You can pay interest only if you choose to, you can pay interest in principle, it's a living thing, you have a limit. And you can run it all the way up to the limit and you can pay it back down as much as you want, and you continue to draw on it.

Drew Thomas  3:02  

So, which is more popular for people? Is it more popular to get a home equity loan or more popular to have a line of credit?

Dave O'Leary  3:35  

My gut is, we actually stopped offering home equity loans, probably fourteen years ago, okay, we just weren't getting that much business from it. Yeah. Home equity lines of credit, the HELOCs actually give the borrower a lot more flexibility. I think it's just more attractive.

Drew Thomas  3:53  

Yeah, I mean, from what I could see, it seems like that is typical of just about any bank is that a home equity loan is not really very common these days. It's mostly a home equity line of credit. And I think for the same reason that you just described, it's fluid, you can take some out, you can add pay some back, but it's always kind of there for you like, like a credit card would be. So, why would I do that as opposed to having a credit card?

Drew and Dave  4:17  

Well, for one, the rate is significantly less, and your availability is probably going to be significantly more. Because a credit card is unsecured, if you stop paying your credit card, there's not a lot short of taking you to court and filing a judgment against you that the credit cards can do. HELOC is actually secured by your home. So, as a result, it's a lot less risky for the bank, so the rates are significantly less. I mean, these days if you're lucky, your credit card rate is going to be 24%, some, somewhere in the 20% range. Yeah, that's true. I just happened to look at my Best Buy card and if you're not using it for... And after you got up off the floor. Well, I only use it, I only use it the 0% things. I keep it in a drawer in my house, but I actually looked at the statement, and it was like 27% or something, if you use it as a regular credit card.

Drew Thomas  5:09  

We've talked about that with different credit cards in the, you know, on the show, but you're right, like department store, quote unquote, I'm using air quotes now on an audio only podcast. Yes.

Dave O'Leary  5:21  

But if this goes video, I'm ready for my close up.

Drew Thomas  5:25  

Mr. DeMille, the specialty store cards, I guess you'd call it nowadays, I don't know how many department stores are still really out there other than like Macy's or Boscov’s or something like that. But those kinds of cards tend to have much higher interest rates, even then your standard sort of Mastercard, Visa, Discover, those kinds of bank kind of credit cards, although those interest rates are pretty high right now, too. Yeah. So, when we talk about home equity loans, and you say that the interest rate is lower, is it based off of a mortgage rate?

Dave O'Leary  5:55  

Well, so the majority of HELOCs are based on an index rate. It's a floating rate, because it can last forever, it could last 50 years. So, it tends to be like, for example, AmeriServ uses prime, I think most HELOCs use prime as an index rate, okay. And Prime is more or less going to sort of float along with whatever the current cost of money is. It's going to be higher a little bit than cost.

Drew Thomas  6:23  

So, when you say prime, that's like the Wall Street prime rate?

Dave O'Leary  6:25  

Wall Street prime rate is eight and a half right now. I mean, five, six years ago, that was like three and a quarter or something like Yeah, so it's, it's been going up. It typically follows what the Feds rates are. Okay. The Fed hasn't lowered the rate in a while. It's just been raising rates. So, when the Fed raises or lowers or rates by a quarter point, the Wall Street Journal announces prime is lowered. Yeah. And just the same.

Drew Thomas  6:52  

And just, just for the sake of the fact that this, these episodes live in perpetuity, we are recording this in April of '24. Correct, right. So, any rates that we may discuss, chances are, by the time you're listening to this, they may or may not be the same. So please keep that in mind. But it's hard to talk about rates without at least mentioning rates.

Jeff Matevish  7:12  

So, so okay, going back to the credit aspect. Yes. So, these loans are secured by your equity in your house, right. So, if you don't make a payment, if you default on your, on your payments, does that hurt your credit score as much? Or?

Dave O'Leary  7:29  

Yeah, I mean, typically, your credit score will sort of bump along if you're making all your payments on time, and typically will sort of rise or once it gets to a certain plateau, depending on what your, your current debt load is, how much debt you actually have. But let me go back and just say the one thing I say whenever I talk about credit scores. Anybody tells you they figured it out is a liar. I have seen people who have never heard anybody in their lives have credit scores in the low sixes. And I've seen people with bankruptcies two years ago with scores in the mid seven. So, like, it's all on a logarithm. And it's there's no rhyme or reason to it.

Drew Thomas  8:04  

Not to get too far off topic, but there are three different credit bureaus out there too primarily. yeah, that people use, and the scores can vary from Bureau to bureau. Right. So.

Dave O'Leary  8:14  

They all, they all use a slightly different formula. But getting back to your point, yeah, that'd be if you default on any piece of credit, it's going to start having an immediate negative effect on your credit score.

Drew Thomas  8:26  

You mentioned obviously, one of the advantages to having a HELOC is that, you know, it's secured by your home, it's the interest rates are lower. But you also mentioned that there's a, there's a possibility, of the idea that well, because it's secured by your home if you, if you default on the loan altogether, the bank that holds the loan could, could use your home and basically come after you. That's not a typical response, though, right? I mean, we kind of talked about that during the mortgage conversation that we had, where the bank is not trying to bilk you out of your home.

Dave O'Leary  8:59  

Yeah, foreclosing on customers is not a sound business practice or business plan. It is a last resort.

Drew Thomas  9:09  

So, one of the things that we try to focus on, on this show is clarify what banking terms mean. So, let's talk just a minute about the term equity because I don't know how many people really, truly understand what that is. So, there's, there's a simple way to explain what equity is, right? Right.

Dave O'Leary  9:25  

So, let's just say a house at 123 Main Street is worth $100,000, whether that's the market determining it, or you know, it's bought for $100,000. But at one moment in time, the house is worth $100,000. Okay, if there's debt on it, say there's a traditional mortgage like what I typically live with day to day, say there's a $70,000 mortgage, first mortgage on loan, well, the equity on the house is now $30,000.

Drew Thomas  9:53  

So, it's the difference between what the house is worth and what and what you owe on it.

Dave O'Leary  9:57  

Correct. So, the HELOCs tend to be a second loan behind a first mortgage position, they'll really won't go into a third lien position, typically our second or first lien positions, majority of the time, there's already an existing mortgage on that house.

Drew Thomas  10:16  

So, using your example, I have $100,000 house, I owe $70,000 on my mortgage, which means I have $30,000 in equity in the house, right? Does that mean that I can just come to the bank and say, hey, I want a $30,000 loan?

Dave O'Leary  10:28  

No, because the bank is going to want to have some equity in that house, so that there's, if there's any fluctuation market wise, it doesn't find itself in a position where it's upside down. So, there's a ratio, it's called loan-to-value. And it's basically what it sounds like, you add up the debt on the house the proposed debt and divide that by the value of the house. The bank shoots for on a HELOC to be no more than 89.99%. LTV. So, there's like 90% is, is a threshold that they don't really want to be above.

Drew Thomas  10:58  

Okay. And that just gives you some wiggle room.

Dave O'Leary  11:01  

Wiggle room, yeah. So, in this scenario, house is worth $100,000, first mortgage is $70,000. We'll go $20,000. Okay, on a HELOC. And that puts us at nine, just at 90%. Okay, LTV.

Drew Thomas  11:15  

This brings up an interesting dynamic, there are people out there who you know, for whatever reason, you know, they, they take out a loan against their home, they take out a HELOC, they have a mortgage, and then, you know, they lose their job, they get laid off, something happens. I mean, these are, these are real world things that could happen, right. So, now again, ideally, you know, if you go to your bank, and you say, hey, listen, I've been laid off from work, and I'm looking for work, I'm looking to try to find a job, but I'm going to your chances are your bank, or your lender is going to try to work with you in that situation within right within reason. Yeah. But ultimately, you took out a loan. Right? And, part of that loan is, is that you agreed to pay back that money with interest.

Dave O'Leary  11:57  

So, what happens it doesn't calculate in, you know, when the bank makes a loan, it's anticipating you're paying the loan, right? It doesn't say like, well, we'll take your house, you know? Yeah. So, it's, this is always a last resort.

Drew Thomas  12:10  

Let's talk just a little bit about how this actually, so that's, that's the bad side of lending. I really shouldn't say bad side, it's just the reality of lending, I guess, I should say is that it's a loan you're supposed to pay back. Right? And there, are there things that happen if you don't. But that doesn't happen, typically, I would say very often, I think most people, you know, the banks are I've gone through the process of buying a house. And we talked about this in the first episode, which was actually the only two part-er so far, because Dave is just, just like, it's full of information. No, see, I was going to say full of good information. And then you go and try to disparage yourself. But when we talk there, there is a lot that goes into evaluating the worthiness of a person to go through a mortgage. Right, right. So, ideally, and if you, if you want to know all about that, go back and listen to episodes, one A and one B, because we talk about that in depth. But because of all of that, I would argue that there's not as much in the way of defaulting on the mortgages and stuff as there might have been 30 years ago. Maybe I'm wrong, you're kind of doing the thing, so.

Dave O'Leary  13:16  

It's actually the regulations are a little more stringent now as far as protecting consumers from foreclosures that are considered predatory or whatever the word you want.

Drew Thomas  13:27  

Okay. But still, I mean, I would argue that the banks probably have a better idea of whether or not you really can make your payments though too now.

Dave O'Leary  13:34  

Yeah, from an underwriting perspective. The, yeah, I mean, yes, we have more time on we've seen, we've got better models on predictability, who pays what, you know, when people are going to pay. And so yeah, that does factor into it.

Drew Thomas  13:50  

Okay. So, I guess my whole, the whole thing I was leading up to was what's involved in evaluating whether I can get a home equity loan? Do you go through the same kinds of processes?

Dave O'Leary  13:59  

You do not. This, this process is significantly less formal and uniform. Because mortgages tend to wind up investors tend to buy huge pools of these things and turn them into security instruments and other things, because so that they're able to do that typical first mortgage underwriting is very formalized, it follows basically computerized rules on does that does actually a lot of the underwriting as far as the credit decision being made. Okay. We use a Fannie Mae underwriting system basically that makes it almost pretty much makes the credit decision for the underwriter. HELOCs are traditional credit, what I consider real credit, the HELOCs at least done at this bank, it's, it's a person underwriting and picking up a credit report and a pen and starting to mark up the credit report manually calculating out the debt to income and things like that. It's because these HELOCs are not going to wind up in a portfolio that could wind up being sold off or anything else like that it's less formalized. And it's more of a commonsense business decision on whether a deal works or not. Okay, so it, as a result, it's a lot faster, there's less documentation required. And sometimes that documentation is very tedious for people to chase down and get, because again, it's just less formalized and less uniform. Okay, it's a much faster process to get approved on a HELOC.

Drew Thomas  15:31  

Okay. So, essentially, if I want to, if I want to get a home equity line of credit, and I keep saying, I keep trying to not say loan, because they are not loans in the traditional sense, they are lines of credit. So, I'm looking to get a home equity line of credit, I have a home, it has equity in it, meaning that I, it's worth more than what I owe. And I have at least that 89%, I'm sorry, that one 10% buffer, whatever it is. So, I decide I want, I want to put, what can I use it for, what can I, what can I do with that kind of a loan?

Dave O'Leary  16:03  

You can use it for working on the house, doing renovations to the house financing that. People use it, you could have a lot of credit card debt, an unsecured debt, that you're paying high credit rates on, you know, interest rates on, and you can refinance that at a significantly lower rate, using the funds from that credit line. You could go to Greece.

Drew Thomas  16:26  

Specifically, nowhere else.

Dave O'Leary  16:30  

We have a deal with the, the Greek travel bureau, but I mean, people we use them for...

Drew Thomas  16:36  

I only want to go to countries that have white walls and blue roofs. Yes. That's...

Dave and Jeff  16:43  

So, I mean, but I mean, you, you can use it for your own purposes. Are there any restrictions? No, no, no. I mean, if you, if you've got a kid in college, and you've got expenses from that, you can use it for that, so it's, we don't really...

Drew Thomas  16:58  

Do you ask, like so, is that something you have to tell the bank like?

Drew and Dave  17:02  

We ask, just because it's part of the credit process, but it's usually not a, now if you're saying, well, I'm going to use it to do something illegal, then yeah, we probably would care then. Yeah, but you got to be a special kind of person, though, to admit that right? Yeah. Yeah. Or you're just really honest. But the yeah, as long as it's...

Drew Thomas  17:23  

The most honest person doing illegal activities.

Jeff Matevish  17:25  

Well, we like honest customers.

Dave O'Leary  17:27  

As long as it's legal and ethical, you know, where we don't really have too much concern about what the use of the proceeds are. Gotcha. But the...

Drew Thomas  17:36  

Because you know what's backing up the loan, right, the loan is being backed up by the home, right? Right. So, in the, in the end of it all, you already know the, that's why you like when you take out a mortgage, you have to say well I'm taking out a mortgage specifically to buy a house. I'm taking out a car loan on, but I'm doing it to buy a car right and the car is actually your collateral, the home is your collateral, but with for this, you already know that the home is the collateral, so...

Dave O'Leary  17:59  

You already own the home. HELOCs are not really used to purchase homes. So, you already own the home. The only time where an underwriter may have some say in the use of funds is during the underwriting process. They're marking up your credit report, and they're calculating your debt-to-income. And debt-to-income, it's again, it's another fairly self-explanatory ratio, it's your debt service that you pay every month and, and payments over your gross income. And typically, we don't want to be above 43% debt-to-income now, which means the other 57% of your gross income is spent on taxes, groceries, gas, utilities, things like that. So, if after the as they're working through the deal, and they see, he's got a lot of credit cards with some high balances on it. The underwriter in that circumstance may say like, hey, if we were going to consider this, you need to pay off and close your Bank of America card, your Best Buy credit card, whatever else. And typically, that's just to get somebody into a reasonable debt-to-income ratio. Okay, those are the circumstances where an underwriter might actually say like this is at least some of these funds are going to be used for this purpose.

Drew Thomas  19:14  

Yeah, so let's, let's, and we, maybe I'm, maybe I'm doing this a little out of order, but it's, it's as it's coming to me. So, let's, let's focus a little bit too about, okay, I'm using it to, as you said, maybe do home improvements, right. So, that's one way to actually increase equity in your home, you can increase equity in your home a couple of ways you can pay down your debt, right? Or you can add value to the home. Right. So, you have some people that will take out a home equity loan for I don't know $30,000 to stick with the same example we've been using, right? And they put, I think we said, $20,000. Okay, I'm sorry. Yeah, yeah, it was $30,000 and then yeah, with a buffer. Yeah. So, so I have a $20,000 home equity loan, I put a $15,000 deck on the back of the house, right? Which theoretically adds value to the home. Right, right. So, at some point like, do, do homeowners typically get their homes appraised regularly? Do you do an appraisal for a home equity loan to make sure there's actually enough equity in the home still?

Dave O'Leary  20:19  

Yeah, so we are required to get evaluation of the collateral, the home. Okay, there's a couple of ways we can do that. One is a full-on appraisal, like you would get for a first mortgage. Those typically cost $500 or $600. The last six years, I think the bank's paid all but $295 of it. And I believe right now they have a special going on through the end of the quarter where they're going to, they're actually covering the full amount, if an appraisal is necessary.

Drew Thomas  20:51  

The other that's here, though.

Drew and Dave  20:53  

I mean, that that's just one bank. I mean every bank is going to be different. But yeah, I'm just, I'm just throwing that out there. Yeah. Because I'm sure somebody from the bank's going to be listening to this. And call me. So, the other way we can do it is basically based on tax assessed value. So, every county in Pennsylvania has, it's called the state actually kind of takes a look at typically how long it's been since the last reassessment countywide reassessment, and then has a, it's called the common level ratio. So, it might be 6.5 for county "X", it might be 2.0 for county "Y", okay. Mostly, it just depending on how much confidence the state has that the tax assessed value is actually even remarkably, remotely close, remotely close to what the actual market value is. So, as a result, what we can do is, we can take the tax assessed value, and multiply that by the common level ratio and have a ballpark figure for what that market value might be, just using the tax assessed value.

Drew Thomas  22:00  

I think about that, because I think just like in the example, you have homeowners who will try to add value to their home. So, you know, they bought a home 10 years ago, it was valued at $150,000. They've put, you know, a significant amount of time, effort, and money into, you know, into doing things to the home. And now, you know if you were to resell it, it might be worth $200,000. Right. But if you don't get an appraisal, then you know, you have to sort of have that in mind. At the same, at the same time, unfortunately, you have people who buy a home and then just let it go to pot. And so, they bought it for $150,000 10 years ago, and they've done nothing to it. The roof is caving in, the basement is leaking, but yet you don't know that necessarily.

Jeff Matevish  22:48  

So, when would you require an appraisal versus when you would rely on the tax assessment?

Drew Thomas  22:53  

Is it based on like how much they're asking for?

Dave O'Leary  22:55  

Part of it is, typically if somebody's asking for more than $150,000, that automatically triggers an appraisal, okay. But also what we'll do is we will look at what the, we will do that calculation using the common level ratio on the tax assessed value, subtract what debt we can, we know about and that we're typically looking at a credit report and we can see a Wells Fargo or whatever else, first mortgage, and you can pretty much tell right there whether using the tax assessed value is going to work. So, if the tax assessed value is coming, coming at $90,000, and they have a $70,000 and they want to borrow $20,000, we're going to have to go to an appraisal at that, at that point. That's going to be much more in depth, that's going to be people walking in the house, taking pictures, everything else, and really should get a to the moment idea what the market value is. They're looking at houses that have sold recently in the area that are similar in quality, size, amenities, things like that. And they’re appraisers and coming up with what should be the market value today. It's still some estimate. That's not an exact science, or some art to it.

Jeff Matevish  24:05  

But that's where that wiggle room comes in.

Drew and Dave  24:07  

Right? Yeah.

Drew Thomas  24:08  

I was actually thinking too. I didn't know, you know, if the length of time that you've owned the home would play into it. And like if it was like, well, you only own the house for five years. How much could it have changed? Versus you've owned the house for 35 years. I don't know what you've done to it, you know, yeah.

Dave O'Leary  24:25  

And, you know, since we're talking about home improvements there, there are people who will say well, I put $50,000 into this house but $30,000 of it was a pool. Yeah. The common wisdom is that you don't get your money back on pools. Yeah, it's not dollar for dollar.

Drew Thomas  24:42  

Yeah, if you're living in Florida, maybe because every home in that area of the country probably has a pool. California, Texas, things like that. But if you're living in the Northeast, and you put a pool in, your interest is your I'm sorry, your not your interest your insurance, thank you, yeah, is probably going to go up more than what the value of the pool is.

Dave O'Leary  25:03  

Yeah. And in some cases, the pool actually can be a detriment when you're trying to sell the house because there are a number of people who aren't interested to having a pool. You get less land, yeah, yeah. So, I mean, it's so there is a there is always kind of a discussion when you talk with people like well, I put $50,000 into the house. Was that kitchens and bathrooms? Because that's usually when you get more for your money. Yeah. Was it, was it a pool and, you know, a roof? Which you don't really, everybody expects the roof to work. You don't really, right. Yeah, you typically don't get a lot more for having a roof put on three years before you sell it just because everybody expects the roof to work.

Drew Thomas  25:42  

Yeah, the only, the I guess the only advantage you have there when you're, when you're selling because I know, it's funny you said three years because that's, that was the, the length of time whenever I was looking at our house, they had just put a new roof on about three years prior to that. And in my mind as a buyer, while it didn't necessarily add value to the house, per se, it was a weight off my mind that well, I should have 20 years. Yeah, I should not have to worry about this for at least 10, 15, 20 years, right. Yeah. Right. But anyway, would I have paid more because it was just done? Probably not. Not unless there was a hole in the roof and I was like, well, I'm going to have to fix that now.

Dave O'Leary  26:18  

It's a jump ball between two houses and you have a 20-year-old roof and a three-year-old roof, that may be enough to push you over, yeah.

Drew Thomas  26:24  

Yeah. Typically, though, I think that, and I mean, I think that there's a lot of TV programming and things out there that give people this sense that, well, if I just put $10,000 into this house, I'm suddenly going to sell it for a million, even though it was only worth $250,000 when I started, right. That may or may not necessarily be true, yeah. Plus, you're not necessarily a professional designer, contractor, whatever. So, a lot of your home improvement costs are usually tied up in having a skilled individual doing the work, right. But that is something to keep in mind that a home equity loan can be used to theoretically, increase the value of your home, right?

Dave O'Leary  27:07  

You know, I mean, you would hope it would be used to increase the value of your home, you know, so. It's, and instead of going outside and borrowing unsecured, or, or from some other source, the rates are going to be fairly low, because it's secured by your house, and you should get a, you know, the amount of money you'll save and paying interest, a higher interest rate over time will save you.

Drew Thomas  27:32  

So, I know we, we discussed interest rates at the sort of the top of the show, but I wanted to circle back to just one other thing, because I think you did talk about this, but and if you did, I apologize, because I must not have retained it in my brain. But home equity lines of credit, you said they can, they can last for many, many, many years. Right? Right. So, are the interest rates variable?

Drew and Dave  27:54  

Right. The rate follows prime. Okay, yeah, you did say that. So, it will float up and down. So, okay. Now there are floors. I was just okay, there. Thank you. Yeah, typically, there's a floor and a ceiling so that the bank will be in a position where if, if rate of say prime went back to 2%, or something like that, that's not even covering the bank's expenses on maintaining the line. So, it obviously doesn't want to do that. So, the bank will make a decision on a floor rate. I think right now, the flow rates 3.25% if the loans again, speaking for AmeriServ, just as an example. We're at floor is, 3.25% for $75,000 or more and 4% if it's less than $75,000. Okay, and again, that that differential is just profitability.

Drew Thomas  28:43  

But and then you said, there's also usually a ceiling of some sort too, where you as the borrower know that, all right, absolute worst-case scenario, my interest rate is going to be "X". Yeah. And no matter what happens, it will never go above that. Right. Right. So, and typically, I would probably assume that that's still going to be less than a lot of credit cards. Yes.

Dave O'Leary  29:04  

You know, yeah, it will be a lot less. If you're in a situation where you've hit the ceiling, your credit card company, or your credit card rates are probably... if the, if the credit card companies are still even in business at that point. I mean, it's, they're, they're going to be astronomical. Yeah, it's a very high, very high ceiling. So, they're not high, high, but it's, it's there's a lot of wiggle room between the floor and the ceiling. Yeah. So, it should just float at prime, prime goes down, well that's to your benefit, prime goes up, your payments go up a little bit. It's, it's still basically using a market indicator of what the cost of the actual funds are going to be.

Drew Thomas  29:43  

Okay. So, how many home equity loans typically do you do in like a year? I mean, is it a pretty popular product? Is it something that people use a lot?

Drew and Dave  29:51  

It's a very popular product. I don't know the number because I'm not well, that's okay. But I mean, I mean, it's not something you do rarely.

Drew Thomas  29:57  

I mean, this is...

Dave O'Leary  29:58  

No, no, they're floating in probably every day, there's one or two HELOCs applications in every day. So, I mean, it's, it's a very we like speaking from the bank's perspective, we have a very competitive product that offers a lot of flexibility. So, a lot of people are interested in taking us up on that, that product.

Drew Thomas  30:15  

So, what I was looking at, one of the numbers that I rattled off at the very beginning was the average HELOC balance per account right now in the in the country, across the country is about $25,000-$26,000. So, that's really not, not a lot. I mean, yeah, I was going to say, I mean, to me anyway, that doesn't seem very, very high.

Jeff Matevish  30:17  

So, you're not you're not taking out a line of credit for the total value of your house necessarily. Yeah.

Drew Thomas  30:40  

I mean, there are probably some credit cards out there that have a balance, that have a $25,000 credit limit, you know, so if that's, if that's where you're at, it's not like you have to take out a $300,000 home equity to do a home equity loan is my, is my point. I mean, you can, you can do stuff that's, there's probably a floor though, too I would imagine. There's probably a point where the banks like, look, I can't give you a home equity loan for $4,500 bucks.

Dave O'Leary  31:03  

Yeah. $10,000 is our minimum. Okay. And again, it's just a question of the, the return on investment for the bank. If a $4,000 credit line, paying at prime isn't going to make enough to make it even worth carrying that loan and the books.

Drew Thomas  31:18  

So, going back to one of the things we talked about before, in figuring out how much equity is actually available in the home. And I said, you know, if you've only owned the home for five years, chances are your estimated value is probably correct, right? Because you've only had your appraisal done just less than five years ago. But you may not have paid down enough on your mortgage to even qualify for home equity at that point.

Dave O'Leary  31:39  

You know, if the housing market wouldn’t had been so volatile in the last five years, I'd be inclined to agree with you more. But I mean, we've seen remarkable increases across the country in housing costs. So, I mean just sitting on a house and paying your mortgage in some areas can lead to 30%-40% increases in the value of the house. We don't live in such a volatile area to our detriment in some way. Sometimes stability is good. Yeah. Yeah. We don't see the highs, and we don't see the super lows. Yeah, that other markets have, markets I've happened to live in. So, but yeah, it's typically in a normal world, after, you know, not, not thinking about the last couple of years, yeah, you know, you don't see that much change.

Drew and Dave  32:27  

Now, I'm not asking you to speculate. And I'm going to just, I'm going to preface this question by saying that because I'm asking you to speculate. But based on your knowledge, your, your past history, your experience in all of this, is this another housing bubble? Are housing costs, are housing values, getting to a point where they're being overestimated? Or is, you know... You would think, but the issue is, there's not a lot of houses, a lot of housing available right now.

Dave O'Leary  32:57  

So, the supply is fairly low. And the demand, even though rates have, have had a negative impact on the demand, to some extent, the supply of good housing and like, even in our market is very low. Houses don't stay on the market for very long. And typically, if a house is on the market for a while, it's either dramatically overpriced, or there's something wrong with it that people are walking. So, people are looking to buy people are looking to buy is what you're saying. And there's not really a lot of inventory.

Drew Thomas  33:28  

And why is that? I mean, is it is it that the sellers think that they can't get their value out of the house, because the interest rates are up?

Dave O'Leary  33:34  

Well, there's a there is a fairly large chunk of the population of homeowners right now that are in rates in mortgages and their existing homes and the 3%s, in some cases in the 2%s. And for them, and they may want to move into a bigger house, or you know, move on to another house. But if they do that they may have, be dealing with the rates in the 7%s. So, they're sort of staying out of the market and as a result, they're not selling, because they don't want to have this huge increase in their mortgage.

Drew Thomas  34:09  

So, is that, do you think that's leading to more HELOCs? Because are people like trying to improve what they have rather than moving to a different home?

Dave O'Leary  34:17  

It has to. Yeah, I mean, it really has to because there's, we're in a situation where, and this was actually sort of preface by COVID too, people were spending a lot more time in their house and looking around and realizing like, you know, I could do this, this bathroom is straight out of the 70's. Maybe I should, maybe I should get this bathroom redone or do it myself or whatever else. So, there already was sort of a push to renovate the houses that people already existing, are in. And again, this is where the HELOC sort of plays into that, because people are going to stay in their houses for longer while they ride out the, the current rate environment. We all sort of hope it will go back down to something similar to where it was.

Drew Thomas  34:58  

Yeah, I mean, I see a similar trend, my dad has been self-employed as a mechanic for over 50 years, and he has arguably never been busier, yeah, in terms of repairing vehicles because people don't, for a long time, there was no inventory for new vehicles, first of all. The mentality that people had of, oh, well, it needs $1,000 worth of work. Never mind, I'll just go buy a new car is giving way to a more old school mentality of hey, I got to keep what I have on the road, because I can't buy a car for $1,000. Right, you know, so I would imagine homes are probably in a similar in a similar boat or similar situation.

Dave O'Leary  35:40  

Yeah. And people are staying in their cars longer, I think because they may have bought their 2020, whatever, at 0%. And now they're looking at 7%. Yeah. And obviously, you can afford a lot less car than you could.

Drew Thomas  35:56  

Yeah. And that's, that kind of goes back to the to the HELOC thing too of, you know, a 7% mortgage rate is comparatively high compared to what it was, say, five years ago. Right, right, a 7% rate on a HELOC compared to your 24% rate on a credit card. Yeah, right. So, that rate number is relative, right, right as to whether it's high or whether it's low, right. And that's what you kind of got to think about too when you're getting a HELOC and you're saying hey, you know, it's a 7% rate on a HELOC. Why would I do that? What if I get a 7% rate on a mortgage? Well, 7% on a $25,000 HELOC is, is more than reasonable, right? 7% interest rate on a, on a $350,000 home is going to be a lot more money. Right? Right.

Drew and Dave  36:44  

And the other thing people sort of get into hooked into, it's a bad habit, but they may have a credit card, and they're, they're just paying the monthly minimum, which is typically just interest, accrued interest. Yep. And they're just banging along paying the minimums. They could have $40,000 in credit card debt. And that interest over time at 25% is a lot of money. So, you can use a HELOC and first of all, knock your minimum payment, you know, even if you just paid what your minimum payments were, you're now paying, paying the credit line down significantly. Because you're paying on the principal as well as the interest rate. Yeah, because you went from 25% to 8%, 8.5%. Yeah, so 8.5% as of today. So, I mean, that savings alone, you can use to pay down the balance on the HELOC and yeah, and, and again, the great thing about a HELOC is, the faster you pay the principal down the more room you make to be able to use it again. So, I mean, you could be paying off your credit cards one year and three or four years later, you have to dig up your front yard put in a new sewer line or something and now and you have availability on your, on your credit line.

Drew Thomas  37:54  

That's excellent. What do you got Jeff, anything? It doesn't help that we have two, Jeff is competing against the two very long winded people because I talk a lot.

Jeff Matevish  38:01  

I'm generally pretty quiet. Yes. It's a learning experience for me. You know, I get to hear the podcast early, I guess. Yeah.

Drew Thomas  38:08  

Yeah, instead of having to edit around, which you're going to have to do some editing on this. We all know that, right. Yeah.

Dave O'Leary  38:12  

So, because I use typically a lot. So, it's alright.

Drew Thomas  38:17  

We're going to, we're going to change it using AI, and we're going to change it to like, peacock, and so, okay, or something, something completely off the wall so that every time it goes up, people are going to really notice it. I'm into it. Yeah. So, well, thank you very much for your time and for your day. What else? Is there anything, before we leave you, is there anything else that we should probably know, or the average person that may be looking into doing a HELOC should probably know that we didn't cover because you know this better than I do?

Drew and Dave  38:47  

Yeah, I mean, we talked about, even if you don't have a need right now, for a HELOC, it's a good idea to have one in place. Because like that scenario I just threw out where you suddenly have to dig up your next door, my next-door neighbor's, you're dig up your next-door neighbor? Just slurred that one a little bit. But my next-door neighbor is just had a huge surprise on her sewer line, like a huge dollar amount. Yeah, so having a HELOC in place, even if it's just sitting there so that if you had a situation where you need to pay Roto Rooter to dig out your sewer line, then you obviously want that done today. Yeah, you have the funds available and they're there. The cost of carrying a credit line without using it at all is $25 a year, just an annual renewal fee $25 to have the ability to tap into equity. You know that to tap into that your house is equity to pull money out.

Drew Thomas  39:42  

Yeah, and I mean you make a good point because I remember a time whenever I was a kid we had, it was Easter Sunday, and our, my parents' water heater just blew up. Yeah, right. I mean, what do you do? You know and I mean, thankfully my dad, I mean, we live in a relatively small town like my dad knew the, the owner of the hardware store down the street and he was able to call him up and he went down, opened up the hardware store and sold him a hot water heater. But the, the end of the day, like, how long can you realistically go without a water heater in your home? Right, right. And that's just one example. And you're probably talking, you know, $800 for the water heater, maybe another few 100 bucks to have somebody come out and put it in for you if it's not exactly the same, because it has to be exactly plumbed, right and everything. Weird things like that. I mean, being a homeowner comes with all kinds of jacks in the box. So, I think you're right, I think having that availability and that peace of mind, if nothing else to just say, look, I don't want to have another payment, but it's better to have another payment and be able to handle an emergency today than not.

Dave and Jeff  40:43  

And as opposed to a home equity loan, with the line of credit, you don't have to use it. You don't have to. So, there's no minimum? There's no, no you don't have to maintain a minimum balance or anything, like if you if you get you know, once a year, we hid it for $25 for a fee. And that's mostly just to cover the cost of postage.

Drew Thomas  41:03  

Because we have to send you a statement, privacy statement. Yeah.

Dave O'Leary  41:06  

So, like, you literally can keep a reserve in place for $25 a year that you can access immediately. I mean, if you, if you have, if you bank with AmeriServ, and you have a line of credit with AmeriServ, you can go on your phone and transfer however much you need to through the app, the banking app. So, if you run into a circumstance where you have an emergency, and you need to get cash, transfer money directly into your checking account like that, yeah, so yeah, I mean, it's a, it's a good thing to have, even if you don't have an immediate need for it. Because if you have an immediate need for it, it's too late.

Drew Thomas  41:42  

Yeah, yeah. Especially if it's Easter Sunday or so. Right, exactly what the circumstance, but you know, something else you said about too, like that actually, I know, you said that, you know, figuring out how to calculate that your credit, your credit score is, is an enigma. Yeah. But one of the things that does go into calculating your credit score is available credit that's unused. Right, right. So, if you have a $25,000 or $35,000 line of credit out there, home equity line of credit out there, and you're not using it, it doesn't hurt your credit score, you know, if anything, it helps your credit score, because you're, you're showing that you could be using this money, but you're not.

Dave O'Leary  41:50  

You can live within your means. Yeah, what that tells a credit underwriter is you're able to live within your means if you have several credit cards that have zero balances. You know, you're able to exist on your, on your, your day-to-day expenses are covered by your cash flow, basically the cash that you have on hand that you need for your income or from if you're retired or whatever else. That shows stability or the on the part of a borrower from underwriter perspective. Yeah. Okay.

Drew Thomas  42:51  

I'll ask another question. Because when it comes to home equity, and we're talking about the equity itself in your home, right, what, you said adding a roof on or fixing a roof probably doesn't add, what does add more equity to a home typically?

Dave O'Leary  43:05  

Well, I'm going to put on my former realtor hat and tell you that you can't go wrong with updated bathrooms and kitchens. Okay, fresh, you know, fresh wall. If you have a house with paneling, we've talked about in the past. Yeah. So, I mean, some of it's also, yeah, some of the, some of it is basically, if you have a house that looks straight out, like it's straight out of the 70s, it's not going to be as competitive with a house that's fairly current and up to date. Yeah. So, I mean, the trick is to try to keep your house remodeled to an extent that it doesn't seem like a time capsule.

Drew Thomas  43:42  

Yeah. And, you know, we always say, because I'm in the same boat as you, I, I still think of 1970s being 30 years ago. It's not, I mean, if your house was built in 1990, yeah. You're already 34 years in, right. So, there's a, there's a different mentality too depending on what age group you're in, when you're listening to this, when you consider quote unquote, old, right, right. But just keep that in mind, you know, the trends change, tastes change. If you have seafoam green and pink in your home, which was typical in the early 90s, it's probably not very, you know, probably not something that's going to appeal to a person who's there's looking at your home today, right? But things like paint and things can be changed. It's the core places you’re like you said a kitchen where you spend a lot of your time, your bathrooms where you know, you just you want you know, updated fixtures and plumbing that works and nice showers and things like that. That really I think add an add value to a home right.

Dave O'Leary  44:50  

So, and you know if you happen to be friends with a realtor, invite them over for dinner. After, after, there's been some conversation about another topic, you may want to ask him like, hey, if I was going to throw $30,000 at this house to try to get $40,000 out of it, yeah. What would you recommend? And they probably would have an opinion. Yeah.

Drew, Dave, and Jeff  45:11  

And if you are a DIY-er for all, for all, just make sure that if your DIY-ing, your DIY-ing it right, exactly. Yeah, you know, there's a lot of there's been a lot of trends toward DIY work. And there's nothing wrong with that inherently. But if you're doing electrical, if you're doing plumbing, if you're doing anything that requires inspections and professional people involved, this feels like a disclaimer, it is kind of a disclaimer, I'm just, I'm just throwing it out there. But please, further, you know, don't, don't do that kind of stuff yourself. If you're not qualified to do it. Right. Some things you can't just learn on YouTube. Yeah. Yeah. I mean, you know if you're learning how to paint on YouTube, you're probably good. Yeah. If you're learning how to do you know, main stack plumbing.

Dave O'Leary  46:02  

Yeah, they're going to charge you more for fixing your mistakes anyway, so.

Drew Thomas  46:07  

That is true. That is true of cars, too, I might add. Yep. All right. Well, Dave, thank you very much. As always, I know we joke around a lot, but you are very knowledgeable. We do appreciate you doing the show and coming in and sharing your knowledge with people for free.

Dave O'Leary  46:21  

My pleasure, waiting for free?

Drew Thomas  46:22  

Yep. Yeah. See that water bottle? That's yours. I'm taking them both. No water for you, Jeff. Oh, yeah, Jeff's here. Alright everybody.

Drew Thomas  46:43  

This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with the goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to Bank Chats, is not intended, and should not be understood or interpreted to be financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program was simply intended as one source of information. The podcast is not a substitute for financial professional who is aware of the facts and circumstances of your individual situation.

Drew Thomas  47:50  

I think the biggest takeaway from our discussion with Dave O'Leary today is that a home equity line of credit can be a fantastic way to borrow just as much money as you need when you need it, and at generally lower rates than what you'd likely find from a credit card. That said, it's important to never overextend yourself by borrowing more than you can afford to repay. As always, I'd like to thank our Producer Jeff Matevish, for his excellent work with the editing, distribution, and transcription of the podcast. If you haven't yet subscribed, we'd really appreciate it if you would. We also love to hear back from our listeners, so if you have a question or comment, please visit ameriserv.com/bankchats, and leave us some feedback. AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial Incorporated. Music by Rattlesnake, Millo, and Andrey Kalitkin. You can find the podcast on any of your favorite podcast apps, or by visiting our website. For now, I'm Drew Thomas, so long.