Americans are more home rich than ever, but making a withdrawal from the First Bank Of Home is a headache.
Even though Americans have trillions in home equity—the most in 13 years—getting a home equity line of credit (HELOC) is still so annoying that one-third of you used credit cards to fund big ticket spending like home renovations even though HELOCs are unquestionably cheaper.
This is insane. But it underscores how broken a process is when people will pay up to avoid it.
Enter Blend, a tech firm that quietly enables 25% of the mortgage industry—from that local loan officer you’ve worked with for years all the way up to giants like Wells Fargo and US Bank—to give you a ‘push-button, get loan’ experience.
This month, the seven-year-old company is adding home equity loans to the mix.
Because Blend is behind the scenes with so many lenders, about 1 in 4 of you can get cash out of your home easier than before just by going to the same lender you already use.
So how does it work if, say, you wanted to fund a home remodel?
If you were using a credit card, it works like this:
-Charge what you need as you go.
-Pay the bill when it comes.
-The bill will be about 14-19% interest.
-You cannot deduct the interest on your taxes.
If you were using a HELOC, it works like this:
-Tell your bank/lender you need to get cash out of your home.
-Complete loan application on phone or email or clunky website.
-Assemble then email and/or upload all docs needed for loan approval.
-Wait weeks while bank/lender assesses your home’s value.
-Only then can you know how much cash you’re eligible to get.
-Then documentation expires, and you must resend updated paystubs, bank statements, etc.
-Eventually you close weeks later.
-And the available cash-draw amount likely changed due to value.
-But the interest is 5.5% to 6.5% today.
-And if the funds are used for home improvement, interest you pay can be tax deductible.
-Plus HELOCs have the same use-as-you-go function of credit cards.
-And once the HELOC is in place, the bank gives you a credit card tied to the HELOC.
-So you just charge remodel costs as you go, but with way lower rates and tax benefits.
If your lender is powered by Blend, your HELOC could look more like this:
-Submit an application in minutes from any device.
-Connect payroll provider and banking/investment accounts needed for loan approval.
-Get “automated valuation” to know ballpark home value and target cash-out up front.
-Because your loan documentation is direct-connected, you don’t need to send updates.
-Manage the process from any device, any time.
-Close about 19 days faster, without shuffling papers along the way.
So if the home equity loan process is easier and the rate is one-third the rate of a credit card AND potentially tax deductible (in the case of using funds for home improvement), is there any reason to use a credit card if you have equity in your home?
The only reason would be if you didn’t have enough equity.
To make you a home equity loan, lenders will cap your total home loan balances (sum of existing mortgage plus a new home equity loan) somewhere between 80% and 90% of your home’s value depending on the lender.
Here’s how that works*:
-Let’s say you bought your home 2 years ago for $450,000 and put 20% down, and it’s now worth $475,000.
-So your loan balance is about $348,000 now, which is 74% of your home’s value.
-Let’s say your lender will do a home equity loan up to 85% of your value.
-That means you can get a home equity loan for $55,750.
-The interest payment on $55,750 would be about $279
-If you spent $55,750 on a credit card, the interest payment would be about $836.
There you have it: your First Bank of Home is the better mathematical (and often better tax) choice than alternatives when borrowing for big ticket items or consolidating non-housing debt into a lower rate.
This isn’t in any way to suggest your home is an ATM machine. But if you have equity in your home and big ticket items to fund or other non-housing debt to consolidate at a lower rate, home equity will usually pencil favorably when you line it up with other options.
Thanks to these new technologies, you can now ‘push a button’ to blend home equity with your budget.
* This scenario assumes 3 things: (1) Your 30-year fixed rate loan rate 2 years ago was 4.5%, (2) Your HELOC rate is 6%, which is today’s Prime rate of 5.5% plus a base rate (also called a margin) of 0.5%, which is a common premium you’ll pay above Prime when you’re borrowing up to 85% of your home’s value like in this scenario, (3) Your credit card rate on this balance is 18%.