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If you are a homeowner, you may be able to borrow from the equity in your property. You can do this by removing a home equity loan or a Home Equity Line of Credit (HELOC). Both allow you to borrow against your home, but a HELOC provides access to a line of credit while a home equity loan allows you to borrow a lump sum.
Both HELOC and Home Equity Loan Interest Rates rose during the pandemic when the Federal Reserve raised its benchmark interest rate to combat inflation. This has made these loan options less attractive to budget-conscious homeowners.
However, with the Federal Reserve cutting rates in September And Novemberand signaling that more rate cuts are coming, there is renewed interest in this method of borrowing — and for good reason. A HELOC offers many advantages in this rate climate, and could save you money in the right circumstances.
Below, we’ll detail four main reasons why taking out a HELOC could be a good thing for your finances right now.
Start by seeing what HELOC interest rate you could qualify for here.
4 Ways a HELOC Could Save You Money Right Now
Not sure if a HELOC makes sense for your financial situation? Here are four ways it could help you save money:
You could pay off or consolidate high-interest debt
One of the main ways a HELOC could help you save money is if it allows you to reduce the costs of other the debts you have incurred.
“If you own a home with equity and also have debts with higher interest rates, such as credit cards, you would be a good candidate to take out a home equity line of credit to “eliminate these higher payments,” advises Mark Charnet, founder and CEO of American Prosperity Group.
Although Charnet said you will need good credit to qualify, the reality is that HELOC rates are generally well below the 23.37% average APR charged by credit cards. Paying off expensive debt with a much cheaper HELOC can result in significant savings over time and make getting out of debt easier because more of your monthly payment goes toward the loan principal.
“If you have accumulated high-interest credit card debt and are only able to make the minimum payment, it could take years to pay off that debt,” warns Domenick D’Andrea, AIF , CRC, CPFA and founder of DanDarah Wealth Management. “With the lower rate a home equity line of credit can offer, you can either continue making the same payment and pay off the debt faster, or pay the new minimum and free up money for everyday expenses. “
Start tackling your debt now with a low-rate HELOC.
You can get financing at an affordable rate
HELOCs may also result in lower costs compared to other financing options you might consider for future purchases.
“A HELOC can save you money by offering lower interest rates than credit cards or personal loans, making it a cost-effective way to finance your expenses,” according to Douglas A. Boneparth, CFP , financial advisor and president of Bone Fide Wealth, LLC. .
D’Andrea also suggests that a HELOC could sometimes be a more affordable option than a car loan, especially in today’s market. “With car costs and interest rates combined at an all-time high, you can use a home equity line to potentially get a lower rate,” D’Andrea said. “You can free up money for your daily needs.”
Evan Luchaco, an Oregon-based home loan specialist for Churchill Mortgage, also suggests that HELOCs could not only be a cheaper financing option, but also an easier one in certain circumstances. “For homeowners looking to invest in commercial businesses, a HELOC can offer faster, less expensive financing options than commercial loans – especially for new businesses or investors,” says Luchaco.
Of course, Boneparth warns that you have to manage refund carefully and make sure your loan is affordable since you are borrow against your home and put your property on the line. Still, he added, because HELOCs allow for interest-only payments during the initial draw period, it could improve cash flow and make the loan more affordable.
You will have more control over your loans
While both home equity loans And lines of credit offer the advantages of affordable rates, HELOC could potentially save you money right now compared to a home equity loan, especially because you have more control over how much you borrow and pay interest on.
“Unlike a traditional loan, a HELOC allows you to borrow only what you need, controlling interest charges based on immediate needs,” says Boneparth. You don’t have to draw down your entire line of credit at once, and if you only borrow a small amount, your interest charges will be much lower, especially if you make payments over time. and as you draw down your line of credit.
“Since payments on a HELOC are typically based on the outstanding loan balance, the more you pay off the loan, the less interest you pay over time,” says Luchaco.
HELOCs also come with variable ratesunlike the fixed rate home equity loans usually offered. This means your HELOC borrowing costs could go down – without you having to do so. refinance — if the Fed makes rate cuts in 2024 and 2025.
You Can Get Tax-Deductible Debt
Finally, a HELOC can save you money when used to finance certain purchases, as these loans can come with tax advantages.
“Interest can be tax deductible if used for home improvements,” says Boneparth. Although you must itemize your taxes on your tax return to receive the deduction, it can still provide significant savings compared to other borrowing methods. Additionally, Boneparth explains that improvements “can also increase the value of your home, potentially increasing equity.”
The essentials
For all these reasons, taking out a HELOC could be the right financial decision now, if you have home improvement projects, high-interest debt to pay off, or other purchases that you’re looking to finance at an affordable rate .
Do you have any other questions? Learn more about your current HELOC options online today.
