You may want to favor a home equity loan for a big reason.
- Both a home equity loan and a HELOC allow you to borrow from your home.
- Mortgages can be a better bet this year because of interest rate trends.
One advantage of being a homeowner is that you can use the same amount of capital that you have created on your property. You can borrow from this equity for various purposes, whether it is to fix problems with your home, for renovations or to use the money for something unrelated to your property, such as starting a small business or going holidays.
Right now, homeowners across the U.S. pay a large amount of equity due to the higher values of the house. And you may be willing to press your own.
If you do not want to take out a new home equity loan (specifically, a redemption refinancing loan) to gain access to this equity, you can borrow from your home through a mortgage or credit line (HELOC). Both options have their advantages and disadvantages, but you may want to favor a home loan this year for a big reason.
It’s all about interest rates
One advantage of getting a home equity loan over a HELOC is that you can lock in a fixed interest rate on the amount you borrow. This ensures that your payments will not increase during the repayment of your loan.
With a HELOC, you have more flexibility in the amount you borrow, as you do not take out a one-time loan right away. Instead, you get a credit line that you can raise over the usual five to 10 years. But HELOC interest rates can be variable, which means that once you withdraw from your HELOC, the interest rate could increase during your repayment period.
Meanwhile, there is a good chance interest rates I will rise this year in consumer products in general. The Federal Reserve plans to increase the interest rate on its federal funds.
Now to be clear, the Fed will not dictate what interest rate you pay on your mortgage or HELOC, because it does not actually set consumer interest rates. Instead, it targets interest rates that banks charge each other for short-term lending. But the Fed’s actions tend to affect consumer interest rates, so this year, it is fair to assume that interest rates will start to rise. And they may continue to rise for years to come.
This is why if you are going to borrow against your home, you can pay to lock in a home equity loan – fast. As interest rates begin to rise, you may want to have a fixed interest rate on the amount you borrow – and make predictable payments.
How To Find A Home Equity Mortgage
As with any loan you take out, it’s worth shopping with different home equity lenders to see who offers the most competitive interest rates. Also, keep in mind that you will be charged commissions to repay the loan, so you will want to pay attention to them as well.
Meanwhile, with housing stock levels so high, you may be tempted to make the mistake of borrowing more, not less. But keep in mind that delaying a home equity loan can have serious consequences, such as losing your home in extreme situations. Before signing up for a loan, make sure you only borrow the amount you need and do not borrow extra.
A historic opportunity to save potentially thousands in your mortgage
Chances are interest rates will not stay at decades low for much longer. This is why taking action today is vital, whether you want to refinance and reduce your mortgage payment or you are about to start a new home market.
The Ascent mortgage expert advises this company to find a low interest rate – and even used them himself for refi (twice!). Click here to find out more and see your price. Although it does not affect our views on the products, we receive compensation from partners whose offers are displayed here. We are always by your side. See the full revelation of The Ascent advertisers here.