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With just weeks left in 2024, there are some important things to consider steps that potential home equity borrowers should make by 2025. But if you are using a crucial asset like your home, there are also some important things to avoid.
After all, when using one equity loan or home equity line of credit (HELOC)your home acts as collateral. If you don’t pay back everything you borrowed, you could be risking your homeownership. So it’s just as important to know what not do what it is to know what steps to take, especially in today’s evolving economic landscape. Below, we discuss four key things home equity borrowers should avoid heading into the new year.
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4 Things Home Equity Borrowers Should Avoid Going into 2025
Here are four key things home equity borrowers, regardless of their financial circumstances, should avoid as we enter a new year:
Assume that rates will continue to fall
Sure, both HELOC and mortgage interest rates have been on a steady downward trend throughout 2024. But it would be a mistake to simply assume that interest rates will continue to fall into 2025. reading inflation was hotter than hoped, and if rates remain above the Federal Reserve’s 2% target, further rate cuts could be suspended or even reversed. But any other number of economic factors could also result in higher rates than what is currently available. So consider acting now or waiting, but understand that delaying assuming interest rates will continue to fall is risky.
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Open a HELOC assuming it will be cheaper
Making the first mistake mentioned above could lead to you making the second one. So don’t make it either. Opening a HELOC under the assumption that it will become cheaper thanks to interest rate cuts (and the variable rate structure of HELOCs) is something we should generally avoid, especially as we look to 2025, when forecasts for the broader interest rate environment vary widely.
Instead, look at home equity loans. These currently have slightly lower rates than HELOCs and are fixed, meaning borrowers don’t have to worry about up and down movements in the interest rate environment as their payments will remain the same (unless refinanced).
Borrow more because your home value is high
Home values ​​have risen in recent years and the average homeowner currently has too approximately $327,000 in equity to use now. Even taking into account the conventional 20% that most lenders prefer that borrowers remain in their homes, this still amounts to a six-figure amount of equity to borrow.
But borrowing more because your home value is now high is a mistake. Home values rise and fall, sometimes dramatically, based on a number of economic considerations. Borrowing too much now, ahead of a possible 2025 home price drop, could quickly lead to you being underwater by owing more than your home is worth. Be strategic and smart about how much you end up withdrawing.
Automatically use your current lender
Even if you are happy with your current mortgage provider, it would be a crucial mistake not to shop around first. You do not automatically have to use your existing lender so you might as well shop around to see what rates and terms competitors are offering.
In some cases, your current lender may still be the best alternative. In other cases, however, you may be better off by switching to another bank. Or you can go back to your original lender with a better offer to see if they can beat it. However, you won’t know which one is the most cost-effective until you start your research.
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The bottom line
Your home is probably your largest and most important financial asset. So don’t borrow from it in an arrogant way. This means that we cannot assume that interest rates, and therefore also the HELOC rate, will continue to fall in 2025. Homeowners should also avoid borrowing too much, even if home values ​​are currently high, and they should investigate all potential lenders, not just the one who currently owns their home. mortgage loan. By avoiding these potential mistakes now, home equity borrowers can increase their chances of financial success, both in the new year and in the long term.
