What is a HELOC and how can it be used?

How HELOCs work and three common ways to tap into your home's value

If you’re a homeowner in today’s seller’s market, you may be inspired to sneak a peek at the value of your own home. As intriguing as that number may be, there are other opportunities to take advantage of that value without selling your home. You can access your home’s equity through a home equity line of credit or HELOC. This revolving line of credit is secured by your home and can be a low-cost alternative to high-interest consumer loans and credit cards. 

How does a HELOC work? 

HELOCs allow you to utilize your home price appreciation in several ways. With Southland’s HELOC you can borrow up to 90% of the appraised value of your owner-occupied home, less the balance of your first mortgage (if any). Funds can be accessed any time and can be used for the things you want to do. Here are the three most common uses for HELOCs. 

Consolidating high-interest debt

The most common high-interest debt culprit is credit cards, particularly cards from banks and retail stores with annual percentage rates (APRs) of 20% or above. While the Golden State of California offers a gold standard of living with the Pacific Ocean, mountains and desert scapes all readily accessible, its residents also have the 14th highest average credit card debt in the United States with cardholders holding an average of $6,729 in unpaid balances, LendingTree analysts find. So, how much debt is too much? While the figure varies on a case-by-case basis, generally if more than 20% of your take-home pay goes toward non-housing debt payments, you’re likely overextended. With the right tools and strategy, it’s possible to get out of debt, by analyzing your spending, controlling expenses and establishing a plan. A HELOC may fit into this approach because it may allow you to replace high-interest debt with a lower rate. According to The Balance, the average credit card interest rate is 20.47%, with store credit cards charging the highest interest rates averaging 24.28%. With Southland’s HELOC Advantage, the five-year fixed rate is as low as 3.25% APR. Taking the HELOC route to consolidate debt may allow you to save money on fees and interest in the long term. 

Paying for higher education

College tuition is another common use for a home equity line of credit. One common issue many families face is an inability to qualify for federal aid because their expected family contribution is too high, while their savings is too low to cover tuition costs, the Mortgage Report shares. Depending on how much money is offered through federal aid, scholarships and grants, a HELOC may help you bridge the gap and give you a cushion to pay for tuition and other college expenses. One benefit to using a HELOC for tuition and expenses is you don’t have to use the total amount of your HELOC limit, so you can only borrow what you need. Initial monthly payments may also be lower for a HELOC because you’re only required to pay back the interest during your initial draw period. Southland’s HELOC features a 10-year draw period with interest-only minimum payments. While you assess your options for funding higher education, including evaluating student loans, a HELOC is a resource to look into. 

Improving your home 

The most common reason individuals open a home equity line of credit is to update their homes. Real estate media company RISMedia finds that nearly 50% of people seeking a HELOC do so for home improvement reasons. The State of Home Spending Report stated that home improvement spending increased 25% year-over-year in 2021 to $10,341 annually per household. The top three most popular projects in 2021 were interior painting, bathroom remodels and smart home installations. 

This year, the projects that are top of mind for the 89% of homeowners conducting upgrades include temperature control and room remodels, according to Angi’s 2022 Home Projects Survey. Temperature controls are popular for west coast homeowners, including smart thermostat installations, with 44% of respondents stating their heating, ventilation and air conditioning (HVAC) systems are outdated. As for room remodels, homeowners’ top room renovations include kitchens, bathrooms and bedrooms, in that order. Not just for functionality, a major driver for these home upgrades is to boost home values. The National Association of Realtors assessed the percentage of cost recovered in home value from each of these projects. HVAC replacement recovers 85% of project cost, kitchen upgrades recover 52%, bathroom renovations recover 57% and main bedroom suite renovations recoup 50% of value from the renovation project. 

Another upgrade that California homeowners are gravitating toward is the construction of an Accessory Dwelling Unit, or ADU, on their property to take care of extended family, create additional rental income, or increase home value. Homeowners choose to use a HELOC to fund the construction of ADUs because they have full control over the funds for the project, interest rates are usually lower than a construction or private loan, interest doesn’t have to be paid until funds are withdrawn, and homeowners don’t have to borrow more money than needed, the ADU organization Casita Coalition shares.

A HELOC makes both large and small home improvement projects a breeze because you only need to spend what you need, and you can use your Southland HELOC Access Visa card to make purchases at any time. There to make your future easy, Southland’s HELOC Advantage features a fixed rate for the first five years of the loan, flexible monthly payments, no origination fees or points and credit line amounts up to $500,000. 

*APR=Annual Percentage Rate. The initial interest rate is fixed for the first five years of the loan and then adjusts to the fully indexed variable rate at the beginning of the sixty-first month. Current HELOC Rate is based on Prime Rate + the margin (0% for up to 70% CLTV, 0.25% for 70.1-80% CLTV, and 1.25% for 80.1-90% CLTV). LTV = Loan to Value and CLTV = Combined Loans to Value, a ratio used to determine the equity available on your home. Other rates may apply based on credit.  Annual cap of 5% over fully indexed rate.  The rate cannot drop below 3.25% or exceed 15%.  The rate shown assumes that you have a FICO of 700 or above. Investment HELOC Rate is based on Prime Rate + the margin (1.25% for up to 70% CLTV). Other rates may apply based on credit profile. Prime is based on the Wall Street Journal Prime Rate + margin based on credit score. All HELOCs are variable rate loans. Rates can change monthly on the first of the month. Rate cannot change by more than 5% in any one year. 10-year interest only terms followed by a 15-year amortized payback period. Closing costs for the HELOC are currently waived (subject to change). $50 annual fee is waived on HELOCs with a minimum outstanding of $10,000 for 30 days during the year. Credit limit determined in part by the equity in the real property, which is used as security for the loan. Maximum loan amount is subject to credit qualification and appraised property value. Membership is subject to eligibility. Real Estate Loans are subject to credit approval. All new accounts will be verified through ChexSystems and are subject to credit approval and verification of equity. Rates and terms are subject to change without notice. Early closure cost reimbursement may apply— If the HELOC is paid off and closed during the first 3 years of the loan, you will be charged a $750 early termination fee to reimburse Southland Credit Union all third-party fees incurred at closing. NMLS #685526. Mortgage interest tax deduction may be subject to income restrictions. Consult a licensed tax advisor regarding your ability to take this deduction.