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Inflation is close to the Federal Reserve’s 2% target. Unemployment numbers are low. And interest rates were just cut for the first time in more than four years. It is clear that the economic environment is changing again and both savers and borrowers need to be prepared. While cost-effective lending options are still scarce – it will take some time for these developments to ripple through to the broader interest rate environment – there are still some that make sense now. Home equity Borrowing is one of them.
Currently, homeowners have approx $330,000 in home equityaverage. And they can access it in a variety of low-cost ways. But the interest a home equity lending product is not the only factor worth considering (nor should it be). Instead, borrowers should review their options more fully before acting. But what is the best option for borrowing equity right now? That’s what we’ll help answer below.
See here how low the interest rate on a mortgage loan is that you can get.
What is the best option for home equity borrowing right now?
While the ‘best’ home equity lending option will be relative to the individual homeowner, there is a compelling argument for each of the following:
Mortgage loans
Mortgage loans come with some of the lowest interest rates available today – just 8.36%, compared to almost 13% for personal loans and a dramatic 23% for credit cards. And if you use it for eligible home repairs and renovations, you can do that too deduct this minimum interest when you file your tax return next spring.
Who is it best for? Home equity loans are currently best for homeowners who want to access their equity at the lowest possible cost, but are unable to withstand the risk that this entails. variable rate Home equity lines of credit (HELOCs) are included. Because home loan interest rates are fixed, borrowers know exactly what their monthly costs will be for the entire repayment period. And if interest rates drop significantly during that time, that is also possible refinance to the lower rate.
Get started online with a mortgage loan today.
HELOCs
HELOCs work similarly to credit cards in that they provide a benefit to the borrower revolving credit line to use. While HELOC interest rates are slightly higher than home loans (currently averaging 8.73%), it may not matter for much longer. HELOC rates are variable and subject to change monthlywhich is a big advantage in the current cooling climate (no refinancing required). They also offer the same tax benefits as mortgage loans.
Who is it best for? At this time, a HELOC is best for a borrower who wants to take advantage of future interest rate cuts without having to wait for those cuts to be formally issued, as the interest rate will adjust independently without action on behalf of the homeowner. HELOCs are also generally better for homeowners who can afford the inherent risk of a variable interest rate, because they can go up just as easily as they can go down.
Reverse Mortgages
Reverse Mortgages enable homeowners to rearrange the normal borrowing flow. Instead of paying back the money borrowed from the built-up home equity to a lender, those who take out a loan can reverse mortgage will receive monthly payments to use at their discretion. As a result, the equity continues to decrease, but it only has to be repaid if the owner sells the home in question or dies.
Who is it best for? This is an easy one: seniors. Only homeowners age 62 and older can qualify for this loan option (with rare exceptions). Still, it’s critical to remember that every dollar borrowed will be deducted from your equity (with interest), so be careful about how much you ultimately decide to withdraw.
Read more about your reverse mortgage options here.
What about cash-out refinancing?
In a different tariff climate cash-out refinancing can be beneficial for homeowners. This occurs when you take out a new mortgage loan for an amount that is greater than your current one. You then use the former to pay off the latter and take the difference between the two as cash for yourself. But that trade-off means that the mortgage interest rate is exchanged. While that would have been barely noticeable in 2020 and 2021, for example, it could be a significant trade-off now, especially now average mortgage interest rate still in the low 6% range. So consider this option, but maybe not now.
The bottom line
Home equity loans, HELOCs, and reverse mortgages can all be the “best” home equity borrowing option right now depending on your financial needs and circumstances, so consider all three. But be careful about the amount you ultimately decide to withdraw, as your home should not be viewed as an endless source of financing. If you cannot repay what you borrowed, you risk losing it entirely.
