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Homeowners in need of additional financing have had few cost-effective options in recent years. One of the cheapest ways to gain access to a large sum of money is to access existing money equity via equity loans And home equity lines of credit (HELOCs). While alternative credit products had (and still do) interest rates in the double digits, both home equity options are available single digit interest rates for qualified borrowers. And those interest rates could fall further now that the Federal Reserve has begun what appears to be a new rate-cutting campaign.
With the first interest rate reduction in more than four years issued in September and others likely when the Fed meets again in November and December, home loan borrowers may be tempted to wait for this formality before withdrawing money from their homes. But in many cases that would be a wrong. Below we explain why you should not wait until November’s interest rate cut to tap into your home equity.
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Why borrowers with equity should not wait for the interest rate cut in November
While a rate cut in November could be beneficial for those borrowing from their home equity, it’s not necessarily worth waiting for. This is why:
HELOCs adjust automatically
HELOC interest rates are variable and subjected to change every month. So there’s no point in waiting for a rate cut in November if you plan to use a HELOC. As interest rates fall (or rise), HELOC rates will adjust independently. In other words, you’ll get the benefit of a lower HELOC rate in November regardless of when you open the line of credit. So postponement offers no additional benefits than what you would obtain by simply taking action now.
Get started with a HELOC here.
Rates won’t drop by exactly the same amount
Interest rates on both home loans and HELOCs are influenced by what the Fed does, but are not directly dictated by it. So they are unlikely to fall by exactly the same amount as the federal funds rate. Some lenders may even preemptively price in assumed rate cuts, meaning what you’re offered in the days after a rate cut likely won’t be materially different from what you could have secured in the days before the Fed took action. So waiting won’t make much difference.
You’re running out of time to use it as a tax deduction
Interest paid equity loans And HELOCs are tax deductible when used for eligible home repairs and renovations. But with only two months left in 2024, you’re running out of time to use these products as a qualifying tax deduction. If you wait until rates drop in November, your tax interest deduction when filing your tax return in the spring will be minimal. Instead, much of the use of the loan – and its tax benefits – will be deferred to 2026.
Your expenses cannot be postponed
If you need a large sum of money, as do many who borrow against their home equity, it is likely that the expenses you need it for cannot be deferred. If you plan to use your home equity to consolidate debt or pay off what you owe to credit card companies, for example, there is no point in delaying. With the average credit card interest rate now almost 23%, while the average mortgage loan and HELOC interest rates are under 9%, you are losing money by continuing to use the former instead of the latter. So don’t wait too long to anticipate a slight interest rate cut.
Use your home equity to pay off your high credit card debt now.
The bottom line
Waiting for a rate cut in November could be beneficial for some borrowers, but probably not for home equity users. Because HELOCs will see their rates adjust automatically, and because rates are unlikely to fall exactly as the federal funds rate does, it may not be beneficial to wait for that. And if you plan to use it for home repairs and renovations, you’re closing the window to deduct the interest from your 2024 taxes. Plus, some expenses simply can’t be deferred, especially for what is likely a marginal benefit will be, at least with a small interest rate cut in November. For all these reasons, it is wise to take action now. Do this in a measured manner, as your home is collateral under these loan conditions. So you want to avoid risking your property if you ultimately can’t pay back everything you withdrew.
