Everything You Need To Know About A HELOC

In today's episode of the Holistic Money Podcast, I dig into the topic of HELOCs (home equity lines of credit).I explain the concept of a HELOC, its benefits, and how to qualify for one. Emphasizing the importance of strategic and responsible borrowing, I discuss various ways to use a HELOC, such as investing in income-generating assets, paying off high-interest debt, and using it as an emergency fund. 

I also highlight the potential risks and costs associated with HELOCs, including the possibility of losing your home if you cannot repay the loan. I will help you better understand HELOCs and how they can be utilized to achieve financial goals effectively and responsibly. Let's embark on a journey to financial freedom and wealth creation without the constraints of traditional budgeting methods.

Key Highlights

[00:00:00] Holistic Money Podcast intro

[00:00:59] Introduction to today’s topic: Why now is a great time for a HELOC

[00:02:55] What a HELOC is and how it operates

[00:03:58] Requirements for one to qualify for a HELOC

[00:04:41] The greatest risk of HELOCs

[00:05:10] Different fees associated with HELOCs

[00:06:48] Why take a HELOC as opposed to a home equity loan

[00:09:18] Different ways one can use a HELOC

[00:11:03] How a HELOC gives you access to an additional pot of emergency funding 

[00:12:27] Why you should start making your principal payments earlier

[00:13:37] Holistic Money Podcast outro

Notable Quotes

• HELOC is something that in the event that you do own a home and you do have enough equity in your home, which I'm going to cover in this episode, it's a great way to have revolving access to a line of credit that is relatively inexpensive and will allow you to have quick access to cash in the event that you need it. 
• A HELOC is a revolving line of credit that allows you to borrow against the equity that you have built up in your home. So your HELOC operates like a credit card. It's not like a loan where you get a lump sum of money; just deposit it into your checking and savings account. Instead. This is access to money you have, the equity in your house that you can draw in small or large installments whenever you need it.
• The good news is that you have complete flexibility on how you can use this money. There are no restrictions or regulations. The bad news is that there are no restrictions and regulations on how you can use this money. And the reason why I say that is because this can be a really great thing, but this can also be a really destructive thing, especially if you're not intentional about how you are using this borrowed money.
• Don't just take a HELOC against your home to go on a fancy vacation or buy a Range Rover or depreciating assets. Make sure that you are getting access to this money so that you can be strategic with investments as they present themselves to you.
• If you're going to borrow money against your home, you're using it wisely and strategically in a way that makes financial sense, not just going out and blowing the money because you have access to more money. 
• During the draw period, which is the f

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Transcript

0:01

Hello and welcome to the Holistic Money Podcast. I'm your host, certified financial planner and money mindset coach, Whitney Morrison. Over the past seven years, I've taken myself from credit card debt and no savings to a seven figure net worth. I did this without a budget or a restrictive money plan, but instead smart, sustainable wealth building strategies combined with changing my relationship with money. In this podcast, you'll learn the ins and outs of my no budget philosophy, practical wealth building strategies, and key mindset shifts to make it happen. There is no shortage of information out there to tell you what to do with money, but teaching you how to think and feel about money, that's my secret sauce. If you've been waiting for a podcast that gives you actionable strategies to not only build wealth, but also feel really good while you're doing it, then you're in the right place. Let's get started.

composer-8ra5ow2vi_editor-clip_clip_heloc-intro_2023-jul-11-0550pm_whitney_morrison's : 0:59

In today's episode I'm gonna be talking with you about HELOCs, which are also known as home equity lines of credit. For those of you that know my financial story, you know that I recently took a HELOC against my home here in Wimberly, taxes to finance the construction of a new investment property that I built on my land. It is a yert, which essentially is like a. Really nice tent. It's a glamping tent, and we've put it up on Airbnb over the past couple months and found great success with this yurt. I think so far we've made about$5,000 a month off of this yurt alone, and now we're using that income to pay down our heloc. In today's episode, I wanted to talk with you about HELOCs because HELOCs are something that in the event that you do own a home and you do have enough equity in your home, which I'm gonna cover in this episode, it's a great way to have revolving access to a line of credit that is relatively inexpensive and will allow you to have quick access to cash in the event that you need it. So I'm gonna be talking about what is a heloc, how you can qualify for HELOC and the way that you wanna think about this HELOC to allow yourself to use this debt in a way that is going to actually help you further your financial goals instead of use it in a way that's going to hinder your progress and not allow you, to move forward financially. So without further ado, let's go ahead and dive in. For those of you that don't know me, my name is Whitney Morrison and I help individuals create financial freedom without restrictive money plans. so if you're ready to change your relationship with money, so you actually build wealth, hit subscribe below and let's make this happen. You can also follow along via the Holistic Money Podcast, which you'll find linked in the description below.

composer-omnvbnciu_editor-clip_clip_whitney_2023-jul-11-0639pm_whitney_morrison's : 2:47

Let's begin by getting the nitty gritty details out of the way by discussing what is a HELOC and how do you actually qualify for one. First of all, a HELOC is a revolving line of credit that allows you to borrow against the equity that you have built up in your home. So your heloc, it operates like a credit card. It's not like a loan where you get a lump sum of money, just deposit it into your checking and savings accounts instead. This is access to money that you have, the equity in your house that you can draw in small or large installments whenever you actually need it.

composer-ezcu1p4ri_editor-clip_clip_whitney_2023-jul-11-0640pm_whitney_morrison's : 3:23

Typically HELOCs have a 10 year draw period, and this is the time that you can take money from this home equity line of credit, and you just have to pay interest on the money that you borrow. You don't actually have to pay any of the principal loan payment back until you move into what's called the repayment period. Which traditionally is 10 to 20 years, depending upon the lender and where you get this heloc, and this is where you actually have monthly installments that you have to pay the interest and the principal on the loan back over a specific amount of time.

composer-yuytd2sbb_editor-clip_clip_whitney_2023-jul-11-0641pm_whitney_morrison's : 3:58

In order to qualify for a home equity line of credit against your home, you need to at least have 15 to 20% of equity already built up in your home. And anything above and beyond that is what you're able to borrow as a line of credit.

composer-9ql8xb3gb_editor-clip_clip_whitney_2023-jul-11-0709pm_whitney_morrison's : 4:14

In addition to minimum 15 to 20% equity in your home, you also wanna make sure you have other lending qualifications that most standard lenders require. Like a good credit score, something above six 50. Ideally in the seven hundreds, you wanna make sure you have a low debt to income ratio. Lenders do look for stable income and solid repayment history just so they can make sure that they're giving money to you and that you're actually gonna pay them back. Now, one of the things you need to know about a HELOC is that when you borrow against the equity in your home, you're putting your home up for collateral. So in the event that you can't pay this HELOC back, your home can be taken away from you. So that's one of the big risks about HELOCs or even any kind of loan you take against your home. Is that your home actually can be taken away in the event that you can't repay. So it's good to keep that in mind when you're considering HELOC as a financial strategy for you.

5:09

So Here's a quick list of all the fees that can be associated with HELOCs number one and origination fee. You could have an appraisal fee, a credit report fee, a title search fee. Uh, document preparation fee alone, recording fee. Uh, notary fee. However, these are all discretionary fees. And you want to make sure that you do your research to find a lender that does not charge these fees because

composer-c3mosljc9_editor-clip_clip_whitney_2023-jul-11-0714pm_whitney_morrison's : 5:35

you can get HELOCs with very low closing costs. Now, don't get me wrong, that's not to say that there are some HELOCs. That you will apply for through lenders who will charge you a loan origination fee. A loan origination fee can be two to 5% of the entire loan amount. So you're looking at, let's say you have a hundred thousand dollars home equity line of credit, that could be$2,000 that you would borrow this money. However, The HELOC that I got, and I know there are HELOCs out there that have zero loan origination costs. The only cost that I paid to get access to this line of credit on my equity was I had to pay an appraisal fee for my home. So basically they have to come in, send appraiser out. Make sure that your home actually is worth the amount of money that you claim it is, cuz that helps them understand how much equity that you have and how much borrowing power that you actually have. But outside of that, it was a relatively inexpensive way to have access to money in our home.

composer-pkci9pies_editor-clip_clip_whitney_2023-jul-11-0744pm_whitney_morrison's : 6:36

And this is primarily why I love HELOCs because they are a pretty inexpensive way for you to get access to cash. Now, that's not to say you're not gonna pay interest on the money that you borrow from your home. one thing you do wanna know about HELOCs is that most of them have a variable interest rate, which means that it can change depending upon the economic climate of interest rates. So for example, when I first took my HELOC against my home, We had originally qualified for 5.5% interest, and now less than one year later, because interest rates have continued to rise, the interest on our HELOC has increased to 9.25%.

composer-ezolfyhvw_editor-clip_clip_whitney_2023-jul-11-0803pm_whitney_morrison's : 7:16

Now some of you might ask Whitney, why would I wanna take a HELOC in the event that it has a variable interest rate and interest rates can move and my interest rate could potentially increase just like yours did? And here's what I'll tell you. The reason why I decided to go with a HELOC over a home equity loan was because even at the time, interest rates still seemed high to me. They were at. Five and a half to 6%. And I didn't want to lock in a loan at a high interest rate, cuz ultimately I was gonna have to refinance it later and I would have to pay loan origination costs on that loan to refinance it down to a lower interest rate. I went ahead and I got a HELOC because I really loved the flexibility that it offered me through the other features of the heloc,

8:01

Number one. I only had to pay interest on the money that I took from the equity of my home for the first 10 years. Number two, I liked the fact that I had access to money, but I didn't need all of the loan right away. So it gave me an opportunity to borrow the money when I actually needed it. And for me, I was putting this investment property on my property.

composer-ezolfyhvw_editor-clip_clip_whitney_2023-jul-11-0803pm_whitney_morrison's : 8:24

I wanted to have a little bit of time for us. To really make sure we could nurture the investment and make sure that it was cash flowing decent enough so we could have enough money from that investment to pay back the heloc. If I were to get a home equity loan where I had to pay interest plus principal, I'd be looking at a much higher monthly payment, and for me in that moment, it just made more sense to go ahead. Get the HELOC with the variable interest rate. Yes, the interest rate has gone up. However, the flexibility of the HELOC was more important to me than the fact that interest rates were going up

9:02

I also like the flexibility that the interest rate will go down when interest rates go down.

composer-ezolfyhvw_editor-clip_clip_whitney_2023-jul-11-0803pm_whitney_morrison's : 9:07

So for me, it was more of the whole package of what HELOCs had to offer that made it compelling to me and was the main reason why I chose that over a home equity loan.

composer-68c2p0joc_editor-clip_clip_whitney_2023-jul-11-0813pm_whitney_morrison's : 9:17

Now I wanna talk about the different ways that you can actually use your heloc. The good news is that you have complete flexibility on how you can use this money. There are no restrictions or regulations. The bad news is that there are no restrictions and regulations on how you can use this money. And the reason why I say that is because this can be a really great thing, but this can also be a really destructive thing, especially if you're not intentional on how you are using this borrowed money. In my episode on how to use debt like a rich person, I highly suggest you watch this video because I talk through the three different ways to use debt. And I talk about strategic leverage as the rich person way to use debt, and I'm gonna talk about that right now in this video because if you are going to borrow money against your home, you wanna make sure that you're actually using it for something that's going to make you money or provide you a valuable return. Later. Don't just take a HELOC against your home to go on a fancy vacation or buy a Range Rover or depreciating assets. Make sure that you are getting access to this money so that you can be strategic with investments as they present themselves to you,

10:24

Other strategic ways to use HELOCs are to pay off credit card debt in the event that the hilar interest rate is lower than your credit card debt. You could also use it to make home renovations and to improve. Your house and the value of your house. The main thing you want to make sure is that if you're going to borrow money against your home, that you're using it wisely and strategically in a way that makes financial sense. Not just going out and blowing the money because you have access to more money.

composer-ghrm9it9h_editor-clip_clip_whitney_2023-jul-11-0836pm_whitney_morrison's : 10:52

Another thing that I love about HELOCs is the fact that you don't have to pay interest on money or even any payments towards your HELOC unless you actually use the money. So it is just giving you access to an additional pot of emergency money. So for a lot of my clients that have low emergency funds or don't have a lot of cash on hand, I always suggest that they go ahead and apply for a HELOC and go ahead and get that line of credit open for themselves. In the event that they do have a real financial emergency. Like for example, they do get laid off from work and it takes them six to eight months to find another job. At least they have access to money. Equity in their home that is free for them. Now, they don't have to pay for it now cause they don't need it now, but in the event that they have some kind of emergency come up, they have access to money. This is another reason why I love the features of a heloc because if you just took a loan against your house, for example, you'd be required to pay that back month over month. Granted, you would have the money in your bank account, but if you don't actually need the cash today, you just want. Access to cash in the future, in the event that you get laid off, have of an emergency or have an investment opportunity that presents itself to you. A HELOC is a great way to do that, and I do know that there are HELOCs that can be expensive.

12:12

The only thing that I had to pay for for this heloc, like I said, was an appraisal fee for my house. I had to pay for my credit score, and right now I'm currently required to pay. Interest on the money that I have borrowed from my home equity line of credit. Although I will say during the draw period, which is the first 10 years, which you only are required to pay the interest back, I do suggest that you go ahead and make principal payments as well, so that you're not stuck with a large principal and interest payment in 10 years When that draw period is up and you go to that repayment period. All right y'all. That is all I have on HELOCs today. I just wanna encourage all of you, if you are dragging your feet on applying for that HELOC on your house, I just wanna remind you, it takes 30 to 60 days to actually close on this heloc. Why not go ahead and take this step now, especially if you can apply for the HELOC in a very inexpensive manner and have access to cash when you need it in the event of an emergency or in an investment pops up. I just think it is a great. Way to get access to inexpensive money for you to make great financial investments or decisions in your life. All right. If you have any questions about HELOCs, please post them below or leave me a comment and I am happy to answer them. Have a great day and I will see you all in the next episode. Have you ever built a budget, but within weeks felt exhausted by the spreadsheets, the upkeep or the restrictive spending categories? If so, you are not alone. Budgeting has never worked for me, so I created a new way, money mapping. Money mapping has all of the things you need to be successful in your wealth building journey. It's simple, organized, and automated, but most importantly, it offers a completely new way to relate to money and manage it in your life. If you're ready to kick off your no budget strategy for building wealth, sign up for my free money map training at www. holistic money. com forward slash money map. Here's to building wealth with ease.