If you’re a homeowner, you could be sitting in a fair amount of cash source right now.
As home prices continue to rise, so will the value of capital in your home (basically, the value of your home is excluded from mortgage). By the end of 2024, the average mortgage-holding homeowner had $303,000 worth of stock shares, according to property data analyst Cotality.
And homeowners are using their interests and opposed it for ready money.
So is it a good idea to tap on your home equity these days? It depends on who you are asking and what it is for. Crunch some numbers.
What’s going on with HELOC and HOME Equity Loan rates?
First of all, what’s behind riding a roller coaster with home equity rates? In early 2024, Bankrate’s largest lender survey of the country’s largest lender found that the average HELOC rate was 10.16%, a record high. It fell 7.9% lower in April. It’s the lowest price in two years. Home equity loan fees also fell to 8.36%. This is lower than about a year.
Much of the decline comes from the Federal Reserve. Central banks cut benchmark interest rates near the end of 2024 as inflation rates become more manageable. According to McBride Home Equity Predictionassuming the Fed continues to cut interest rates, both rates will continue to fall in 2025.
As of mid-May, this is where the average home equity loan and HELOC rate stand.
| helic | 10 Years of Home Equity Loan | 15 years of home equity loan |
|---|---|---|
| 8.14% | 8.52% | 8.42% |
How interest rates affect housing stock borrowers
Currently, Bankrate Rates’ survey of the nation’s largest lenders shows that the average residential equity loan and HELOC rate currently ranges from 6.32% to 12%, depending on loan terms, lenders and finances. However, just three years ago, these averages were close to 5.50-6%.
The difference in fees affects monthly payments and the total interest you pay. Compare two $50,000 10-year fixed rate residential equity loans. One is 6% and the other is 10%.
| 10 Years Home Equity Loan for $50,000 | 6% interest | 10% interest |
|---|---|---|
| Monthly payment | $555 | $661 |
| Total interest paid | $16,612 | $26,290 |
With a 10% interest rate, your monthly payments are $106 more than the 6% interest rate. And the total interest you pay over the life of your loan is $26,290, which is almost $10,000.
Why are home equity loans so popular now?
It’s no wonder tapping equity is attractive as it’s worth the historic high priced home. “If you have large, unplanned expenses or home renovation projects, home equity is often the route to raising funds,” says McBride. But why through Home Equity Loan or Helock? Mainly because it is only other method, Cash-out refinancethese days it’s not that economically meaningful. Many homeowners have major mortgages locked in at 3 or 4% of their current mortgage rates that they don’t want to lose. So instead of exchanging the main mortgage, you’re taking out a second mortgage instead.
Also, home prices are very high and homes are very small, so many homeowners remain in place. Renovating their homes Instead of moving. There are benefits to doing so using a home equity loan. If the funds are used to repair or improve your home (and to itemize tax returns deductions), the interest on the loan is tax-deductible. Additionally, Home Equity products offer longer repayment terms.
Heloc vs. Home Equity Loan: Which is better today?
If you need to choose between HELOC and Home Equity Loan, there are several aspects that can make HELOC more attractive in today’s market.
- Variation rate: HELOCs have a variety of interest rates through terms. This means that borrowers may benefit as interest rates drop, but with fixed-rate home equity loans, the fees remain the same.
- Fund speed: Home Equity Loans may take more than 45-60 days for them to close. In contrast, HELOC funding can take between two and six weeks.
- Flexibility: Helocs offers a more adaptive approach. It provides the ability to draw and repay available funds like a credit card. You will only have the option to charge interest on withdrawn funds (not on the entire credit line) and usually pay the minimum interest during the draw period. With a home equity loan, you will receive a lump sum and immediately begin paying off the principal along with interest.
Disadvantages of Home Equity Borrowing
Of course, Home Equity products also come with warnings. First of all, they use your home as collateral. “Home Equity Loans and Helock are tied to your home, so if you can’t pay, you risk losing your home,” says Chloe Moore, founder of Financial Staples, a virtual fee-only company. This also allows you to bind if your home prices drop significantly. Between the first and second mortgages, you can borrow more money than your home is worth.
“Think about why you want to use home equity,” adds Moore. “If it’s a home renovation project, can you wait? If you’re consolidating your debt, are you sure you have a solid plan to pay off your loan and avoid any further debt over time? Are there any risks of layoffs? All of these things need to be considered carefully before draining your stock interests.
Alternatives to Helocs and Home Equity Loans
If you decide that Heloc or Home Equity loans are not the right borrowing solution for you, there are alternatives.
Personal loan
Instead of tapping on your home equity, you can consider getting an unsecured personal loan. They are not tied to your home, so if you can’t pay it back, you don’t risk losing it. They are also convenient and quick, and one day they get funds in.
But “it usually costs more,” says Adam Boyd, director of consumer loans at Citizens Bank. “The average rate you get on a personal loan will generally be higher than what you get on a homemade product.” For example, as of mid-May, the average rate for unsecured personal loans was 12.43%, 4 percentage points higher than home equity products.
Also, aside from special purpose home improvement loans, unsecured personal loans are generally not something you can take that much. “Unless they’re in a very good financial situation, most people aren’t going to win $50,000 or $100,000,” says Ron Haney, senior vice president of housing finance policy for America’s Independent Community Banker.
However, “If you’re borrowing $15,000 or $20,000 and you have really good credit, a personal loan might be a good route to go,” says McBride.
Cash-out refinance
Refinancing cash-outs may be another option. The refinance rate remains lower than the home equity loan fee, and may not be a very bad deal depending on how well the old and ownership stocks of major mortgages cost.
For example, during the 30-year loan period, I borrowed $50,000 in a home worth $400,000, with my current mortgage rate at 6% (average 30-year fixed mortgage rate in 2008). As of February 3, you will be able to acquire a 30-year fixed cash-out refinance at 7.01% and withdraw $80,000 in shares. So refinancing may make more sense than getting a home equity loan or HELOC at a significantly higher rate.
Home Equity Loan Conclusions today
Be careful before getting your HELOC or Home Equity Loan now. The rate is at least lower than a year, but that should not be confused with lower overall. “Look at the options you may have, including not doing that,” says McBride. “If you borrow, you need to have a solid plan to pay it back.”
However, not all borrowers have the option to wait for the rate to drop. For example, your home may need to be modified earlier than significant repairs or delayed work. Or you would like to completely clear the balances of these credit cards.
If you’re about to tap on Home Equity, compare products with different lenders. These rates change frequently and may vary widely depending on your lender and financial profile.
“As you research, instead of focusing solely on the advertised fees,” advises Boyd. “To speak to your lender and make sure you are considering all the costs associated with the loan, understand what other regulations are attached to that rate.” In this way, you can better choose the right home equity product for you – whether it’s now or in the future.
Additional Reports by Ashlee Valentine
