As housing values increase across the country, more people are thinking about tapping into that hidden potential in their homes. Home equity is becoming a thing again, guys, and there’s no denying that it’s a great solution for life’s problems, both big and small. If you plan on staying in your home for the long haul, taking out a home equity loan or a HELOC can be a smart move for purchases that can be somehow considered an investment in the future. I’m not going to spend too much of this article lecturing you on how to spend your money, but let’s just say that tapping your equity to buy your kid a safe car for college is a much better idea than using it for a wild weekend in Las Vegas.
Today, my main concern is how to maximize your HELOC so you can get as much money out of your equity tap as possible. Now keep in mind that a HELOC and a home equity loan are different. With a home equity loan, you get one chance to tap your equity, so they’re generally used for one time, large expenses like extensive remodeling projects. HELOCs, on the other hand, are treated more like an open credit line that can be used for virtually anything and tapped repeatedly for small and large purchases. Ideally, you’ll use your money wisely, but because of the nature of the thing, you can pretty much spend the cash any way you want.
Again, I don’t advocate using your home’s equity for frivolous spending, but I’m sure there are plenty of small ways you could use your home’s equity smartly. Besides upgrading your siding, you could also have a major car repair completed and invest in some lightly used high end kitchen appliances, for example. These are just some ideas, you spend your money in a way that makes sense for you. My goal is to help you get the most possible so that you’re not forced to make hard or impossible decisions.
Three Parts to Maximizing Your HELOC
There are basically three big pieces to the HELOC puzzle: your credit, your house and your final presentation. Each of these parts need to work together in order for you to get the most bang for your HELOC buck, so to speak. A HELOC is a loan that’s not subject to many rules, so the ultimate goal is to convince your lender that you’re worth the trouble — that’s why you’ll need to really make an effort to put all the parts properly into play. Let me walk you through each one:
A HELOC is a credit-based loan, which means you’re going to need some kind of credit to qualify for one. You might not need the best credit in the world, but a good credit score, in the mid to upper 600s, a strong history of on-time payments and a general lack of signs that you’re going to decide one day that you’re bored with making payments and will simply stop paying are a good place to start. A solid source of income, like long-term employment, a steady retirement fund or a healthy business are also helpful.
Just like with securing a purchase mortgage, a bank will look at all your risk factors before determining if you’re a good bet before determining if they’ll open a HELOC for you. The difference is that a HELOC isn’t always a straight up yes or no. Sometimes, you get a lesser offer or a higher interest rate than the initial discussion indicated. So, if you went in thinking you’d get a 90 percent loan to value HELOC and your lender decided that you’d only credit qualify for an 80 percent LTV HELOC, you’re still not totally out of the game. Depending on the value of your home, it might end up being enough money to accomplish your financial goal anyway.
However, if you see a HELOC coming in the distant future, you can do a few easy things to make yourself look much better today:
- Get a copy of your credit file with scores from MyFICO.com. Look, I know it’s $60, but this is a very similar credit file to what your lender will pull in order to determine your eligibility for a HELOC. You want to know what’s in it, what your credit scores are today and what negative things are reporting. Use this information to clear up bad debt and further improve good credit history.
- Make on-time payments. There’s nothing as important to your credit score as on-time payments, so keep making them! Use a tool like Google calendar if you’re forgetful like me and tend to overlook due dates until you’ve got a late notice in the mail or email. A simple reminder from your angry smartphone or calendar can be enough to keep those payments going in on time.
- Pay down debts. You need a certain number of credit lines to maintain a credit file. Usually that’s around three or four, depending on the type of debt you have (this is not a hard and fast rule and varies depending on just who is looking at it), so don’t go around paying off and closing all your credit lines. Instead, pay them down until your debt to credit ratio is under 60 percent. So, let’s say you have a total of $10,000 in credit. When you manage to pay it down to $6,000, you’ve freed up 40 percent. Keeping no more than 60 percent of your credit lines tied up will increase your FICO score, as well as decrease your debt to income ratio.
The final amount you’ll get from your HELOC is, in part, based on a new appraisal performed on your home before the paperwork is finalized. So your home needs to be in great shape before your appraiser comes out. None of this, “I plan to do this” or “We’re gonna do that” stuff — they don’t even care a little bit. All they care about is what they see the day they’re there. Your appraisal might as well have the subtitle “What I Saw Today.”
So, if you’ve been thinking about doing some projects around the house, or you have some that are half finished, get them finished. If you’re thinking about doing some upgrades but aren’t sure where to spend your money, I have some ideas:
- Spruce up the kitchen. This does not mean to go all out. Think middle of the road upgrades — nice, but not too nice (unless your house is one of those houses where that’s totally appropriate). Go to some Open Houses in your neighborhood and see what’s normal for your home’s price range. For example, my home is a middle range place — totally average cottage style house. I’ve been thinking about new kitchen counters since the cement counters annoy me to no end. My husband has this weird obsession with granite counters, but they’re totally inappropriate for our home’s price range. Instead, homes in this range typically come equipped with formica or ceramic tile counters, sometimes you’ll see a Corian counter if someone really splurged. Not only are over the top upgrades investments you’ll never see play out in appraisals, they can be serious turn-offs to future homebuyers. Buyers get a certain feel for what’s “normal” in their price range, so if things go beyond top of the line into “simply weird” territory, they’ll get the heebie jeebies and find another place to call home. Some upgrades are nice, but remember that too much upgrade is simply too much.
- Baby the bathroom. The second most important room in your house for valuation purposes is often the bathroom. Or the bathrooms, if there are several. Just like with the kitchen, you don’t want to go overboard, but bringing your baths up to date with modern equipment and a contemporary aesthetic can increase the value of your home dramatically. Modifications like adding a shower where there’s only ever been a bathtub or brighter lighting can change a dark, frustrating bathroom into a space people will truly appreciate.
- Remember first impressions count. If you can only spend money in one place, invest it on the front of your house. Curb appeal is a real thing and it affects appraisers as much as it does buyers. After all, appraisers understand how likely buyers are to drive past a house that doesn’t look like much. So, start by creating a home that looks welcoming. Add landscaping, a sweet picket fence or a covered porch where possible. Even simple touches like shutters, a new front door and a full view storm door can give your home a whole new feel and lots of appeal.
Your Final Presentation
With your credit made as beautiful as it can be and your home projects budget directed in areas that will produce the best results, you can turn your efforts to getting ready for the appraisal. You should be doing this days and weeks and even months before your appraiser actually appears. This is the sort of white glove part of the exam, so keep in mind that you’re basically trying to sell your house to the appraiser — so treat it like you’re selling it.
Move anything extra into storage temporarily, clean your rooms to the point of pain, organize the clutter, keep everything tidy, finish projects (both related and unrelated to home improvement), use your best linens, make the house smell like a house in Better Homes and Gardens looks. In short, create an inviting illusion. And I don’t care if your dog comes running through the kitchen the hour after the appraiser leaves and tracks mud all over the tile and onto the bed and the couch, that alarmingly perfect scene only has to last as long as the appraisal does.
I’m not the only one who can personally attest to the power of a clean house on an appraisal, this article on Realtor.com agrees with me. Even though it shouldn’t make a difference, it does and I’ve seen it happen again and again. You can take two houses that are in similar shape and of similar size and construction quality, but one’s messy and the other is a showroom and that house that looks like you could eat off the floor will always appraise for more.
Why? Because quality is a perceived quantity. And that’s a very real thing that appraisers have to judge. A clean house can come across as a better quality house — that’s what you need right now. Just trust me on this and rent a rug shampooer, hire a cleaning crew, pay someone to watch your kids and your dog during the appraisal — it’ll all pay off in the long run.
The Bottom Line: You Can Get More Out of Your HELOC
Hopefully this article will help you get a little more out of your HELOC. Nothing I’ve suggested in it is illegal or immoral, it’s just basic common sense stuff that you’d advise a friend to do if you knew what I know about the real estate and mortgage industries. Just remember that the real trick is to put your best foot forward, so even if you don’t have the money or the time to update your kitchen, a deep cleaning, brighter lightbulbs and a fresh coat of coordinating paint can go a long way to improve your end result.
Don’t neglect the outdoors, though. Freshly mowed, healthy grass and a tidy driveway give the impression that you really care about your home. A quick power washing of your old siding and patios or decks can also liven things up a little. There are a million little ways to make your home feel new again and if you’re looking into a HELOC, it’s time to read up on them all. Just remember, your home and your credit are the two biggest factors; neglecting either is inviting disappointment.