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In the current economic climate characterized by persistently high inflation and high interest rates, accessing a large amount of cash through traditional lending channels has become an expensive proposition. Now that the Federal Reserve has raised interest rates and paused at a 23-year high In an effort to cool inflation, benchmark rates have pushed up borrowing costs across the board. For example, the average interest rate on a personal loan now exceeds 12%, while credit card annual percentage rates (APRs) routinely top 20%.
However, it is an option for homeowners with little money the equity they have built up in their homes can be one of the most affordable ways to borrow a substantial amount of money right now. When taking it out a home loan or a home equity line of credit (HELOC)use the current market value of your home as collateral to free up money at a generally affordable price.
That said, like other interest rates, the interest rates on home loans and HELOCs are still higher than a few years ago. However, these rates still make sense borrowing equity look downright attractive compared to the double-digit annual interest rates associated with most other consumer financing options. And there are a few other good reasons why it might make sense Make use of the equity in your home to access cash now.
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6 reasons to tap your home equity for cash right now
Here are a few compelling reasons why this may be an opportune time for homeowners who need access to cash to consider tapping into their home’s equity:
Access to some of the lowest interest rates
With personal loan rates of over 12% and credit card rates of 21%, homeowners who borrow against their equity can access funds at a relatively low cost. That’s because right now the average interest rate for a fixed-rate home loan is just 8.59%, while the average HELOC rate is 9.06%. This means that both options have average interest rates that much lower than the other options.
And even a small difference in the interest rate on a loan can make a big difference over time, especially if you borrow large sums of money. This low interest rate on home equity, in turn, makes it one of the most prudent financing options available today.
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Ability to borrow large sums of cash
One of the main benefits of tapping into your home equity compared to other financing options is the pure amount of money that you may have access to. Right now, the average homeowner does almost $300,000 in equity built up in their home. Of that $300,000 of equity, about $190,000 is addressable equity for the average homeowner, meaning it can be borrowed from with a mortgage loan.
To put that in perspective, most personal loans from banks and credit unions are up to $50,000 for qualified borrowers – and the largest amount you can typically borrow with a very robust borrower profile is around $100,000. And rarely do major credit card issuers extend their revolving credit limits beyond about $30,000 without the cardholders having excellent credit profiles and high incomes.
In contrast, the average homeowner’s ability to potentially unlock $190,000 or more in affordable cash by simply borrowing against their home’s equity value is difficult to match through other financing options.
Possible tax deductibility
In addition to the low interest rates and higher borrowing limits, the IRS offers an extra incentive for homeowners who use home equity to finance renovations, additions or other substantial improvements to their property. If the borrowed money is used for eligible projects that increase the value of your home, the interest will be paid on that debt you can deduct from your taxable income. This makes taking out equity for home improvement purposes even more affordable compared to the alternatives.
Choose from different types of loans
Borrowers with home equity can opt for a traditional home equity loan a loan with a fixed amount with a fixed interest rate and predictable monthly payment, or a HELOC, which works like a revolving line of credit, allowing you to withdraw funds as needed at variable interest rates during the draw period. And both home loans and HELOCs are coming in different loan conditionsat.
With multiple loan options and different loan terms to choose from, you can tailor your home equity loan to your needs. For example, if you need a longer period of time to pay off your debts, you can opt for a mortgage loan with a term of 20 to 30 years, which will give you enough time to pay back what you borrowed. Or if you want to save on interest costs and pay off your loan quickly, you can opt for a term of just five years.
Funds can be used for almost any purpose
From financing the addition of a new bedroom or in-laws room to paying off high-interest credit card balances through debt consolidation or even covering the cost of a child’s college tuition or financing the renovation of your dream kitchen, the loan comes arises from removing the equity from your home can be used for almost any purpose, personal or otherwise. This virtually unparalleled flexibility makes home equity borrowing an attractive option if you now need access to a large amount of money at an affordable price.
Collateral could make approval easier
Unlike unsecured debt such as personal loans or credit cards that are issued solely based on your credit profile, home equity lending products require you to to use your house as collateral. This provides additional security to lenders and can make qualifying easier, since you have a significant stake in the game through your home’s equity interest.
That said, you need to understand that if you default, your property is at risk of foreclosure. So while using your home as collateral could mean an easier approval process, it also has potential drawbacks that you should consider in advance.
it comes down to
While tapping into your home equity for cash may be one of the wisest borrowing moves during this period of high interest rates, it’s still critical to take the decision seriously. Calculate carefully whether you can actually pay the new periodic payment on top of your existing mortgage and household budget. And understand that you’re putting your home up as collateral, so any inability to keep up with payments later could jeopardize your living situation. But if done wisely, a mortgage loan or HELOC can provide significant financial flexibility at a relatively affordable cost in today’s environment.
