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Loans that are covered by the equity in your home are often very affordable. This was true even as interest rates rose in the post-pandemic era thanks to rising inflation, which caused the Federal Reserve to raise its benchmark interest rate. While most debts became more expensive at that time, borrow against equity remained cheaper than credit cards and personal loans.
With the The Fed is now taking steps to lower interest ratesincluding a 50 basis point cut in September and other rate cuts expected in 2024 and 2025, forecast of a mortgage on home equity becomes even more favorable. Rates have already fallen after recent spikes and This decline is expected to decrease further this autumn and beyond.
If you want to take advantage of falling interest rates, keep in mind that there are two ways to tap into the equity in your home without affecting your current mortgage. You could take one out equity loanwhere you pay a fixed rate to borrow a fixed amount. Or you can do one home equity line of credit (HELOC) with a variable interest rate that provides a line of credit to draw on when you need it
Home loan interest rates and HELOC rates however, can vary, as can the way these loans are structured, so the big question is whether that is the case a mortgage loan or HELOC is better when interest rates are falling. Here’s what you need to know to get your answer.
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Why a HELOC could be cheaper if rates are reduced
As of October 8, 2024, the national average rate on a HELOC is 8.94%, while the overall average rate for home loans is 8.37%. Although HELOC rates are slightly higher than home loan rates, this trend is unlikely to last.
“HELOCs typically have lower interest rates than mortgages in a given market,” says Kevin Leibowitz, president and CEO of Grayton Mortgage. “Mortgage loans have a higher interest rate because they are fixed.”
In other words, borrowers will often accept higher rates for a home equity loan their rate is fixed and they don’t have to worry about it getting more expensive over time. However, in the current market, there is a good chance that HELOC rates will fall rather than rise, as the Federal Reserve has signaled its intention to continue rate cuts through 2026.
“HELOCs will benefit the most from rate cuts because they have variable rates,” said Domenick D’Andrea, financial advisor and co-founder of DanDarah Wealth Management. “Since we hear from the Fed that further rate cuts can be expected in 2024, a HELOC may be a better option than a mortgage loan.”
Of a loan with variable interest like a HELOC, your rate is tied to a financial index and moves with it.
“Home loan line of credit rates typically vary based on bank interest rates,” says Eduardo Berain, executive vice president of consumer real estate lending at Frost Bank. “As top rates drop, HELOC rates will also drop, which will be good for consumers.”
HELOCs can also be easier to qualify for than home equity loans, D’Andrea explains, and you can tap into your money as needed while only paying interest once you’ve borrowed. However, you need to find out if your HELOC has a floor, which would mean your rate can’t fall below a certain threshold no matter how low the market interest rate is.
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Home equity loans are still an affordable option
While many borrowers will benefit from it securing a HELOC And if we see their variable interest rates decreasing over time, it doesn’t mean home loans are the wrong choice for all borrowers.
“As the market drifts lower and the Fed cuts rates, interest rates for both home loans and HELOCs will fall,” Leibowitz says.
Borrowers who take out a mortgage loan are likely to pay less in the coming months than those who borrowed at the recent peak. The key is that once borrowers lock in a certain rate, it won’t change – even if interest rates on new loans continue to fall.
For this reason, borrowers considering a home equity loan may want to wait a little longer until further Fed rate cuts open the door to more favorable deals.
“If you can wait until the next expected rate drop and you feel more comfortable with a fixed rate than a variable one in the future, then a mortgage loan may be a good choice,” says D’Andrea. “I wouldn’t look at a mortgage loan right now unless you need the money right away and use them as soon as you get them. That’s because you’re locking in a rate that’s probably higher than you could get.” a few months.”
The bottom line
Ultimately, a lot depends on your timeline and risk tolerance. If you need to borrow as quickly as possible, a HELOC may be the better choice. You now have access to a line of credit, can draw on it as needed, and watch your interest rate drop over time if the Fed continues its planned cuts. But if you prefer the security of a fixed-rate loan, that is possible wait until housing rates fall furtheryou will likely be able to find an affordable loan at a good interest rate that you can keep for the long term.
