The Real Estate Piggy Bank – HELOC loans


Owned real estate is like a piggy bank that can provide a source of capital, especially when it increases in value, in the form of a Home Equity Line of Credit (HELOC). This is a commonly used practice in the commercial sector whereby a landlord buys a building, makes improvements to elevate its value, and then draws out capital by re-financing the property or taking out a second mortgage.

A home equity line of credit (often called HELOC) is a loan whereby the lender agrees to lend a maximum amount within an agreed period, where the collateral is the borrower’s equity in their home. Its almost the equivalent of a second mortgage.

Home Equity Lines of Credit were a very prominent component of the last real estate cycle. HELOC’s are used to pay for college tuition, home improvements, to pay off other debts, etc. Often these loans are taken out for the wrong reasons: vacations, cars, shopping trips, etc. Many HELOC loans have set interest-only payments for the first few years (usually 10 years) and then principal payments kick in to make these payments much larger as amortization is included. This year banks will originate more HELOC’s since 2007. Many are concerned about the volume of HELOCS that are in trouble.

Many who cannot pay down their HELOC debt should evaluate re-financing if their properties have retained their value or escalated in value. Tying in the HELOC debt to your one primary mortgage at todays historically low interest rates makes the most sense for most. If your home has decreased in value, this would not be an option.

Balances on HELOC’s nationally have dipped now below $500 billion. Student loan debt is over $1,25 trillion to put things into perspective. Auto debt and Credit card debt are on the rise.

There are many advantages to home ownership and one of them is the concept that its a ‘forced savings account that also provides shelter’. One distinct advantage is your ability to draw out additional capital if and when its needed. But this should be done with great caution.

Leonard Steinberg