Nerdwallet: “A Rule of Thumb for Tapping Home Equity”

Jan. 21, 2015 — In today’s article by Holden Lewis, Senior Writer/Spokesperson for Nerdwallet, he explains:

You plan to keep your house for a long time. But it needs some work. Renovations are expensive, and you want to avoid getting in over your head when you borrow against equity. With that in mind, take an old-timer’s advice on using a variable-rate home equity line of credit: “Don’t borrow a lot, and don’t borrow for long.”

That guidance comes from Lou Barnes, who retired in 2023 after working for 40 years in real estate and mortgage banking. Barnes saw his share of dramatic swings in interest rates. That experience informs his advice for using a home equity line of credit, or HELOC: Borrow an amount that you can pay off reasonably quickly, then follow through with your rapid repayment plan. Barnes’s advice has an implication: If you need to get your hands on a chunk of change that will take many years to pay off, consider a fixed-rate home equity loan.

For more insights, Holden tapped Marguerita Cheng, CFP® Pro, CEO of Blue Ocean Global Wealth, in Gaithersburg, Maryland. She says: 

1. Don’t borrow a lot: Home equity loans make more sense at high loan amounts. The threshold of what constitutes a high loan amount depends on your circumstances. Cheng ballparks it as somewhere between $25,000 and $50,000. If they’re just trying to get new appliances, countertops, and paints and redo the kitchen, I think that they can pull that off with a home equity line of credit. But if it’s something like an addition, maybe a loan might be better.

2. Don’t borrow for long: This has a more solid definition. If it’s not a lot of money — they probably can pay it off in two or three years, you know — the line of credit makes sense. Remember that HELOC rates respond to an unpredictable market. If you carry a HELOC balance for more than two or three years, you risk getting caught in a Fed rate hike frenzy. A fixed-rate home equity loan might work better. This brings up a tip: Some lenders let you borrow from your HELOC and then convert some or all of your balance into a fixed-rate, closed-ended loan. In other words, a home equity loan. Look for this feature when shopping for lenders.

Click here to read the entire article.