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The economy is in a certain transition period. Inflation has slowed considerably, and with the Federal Reserve recently reduction rateborrowing costs have also fallen. Rates on real estate loan products, in particular, are being impacted, notably Home Equity Loans and Home Equity Lines of Credit (HELOC).
But even though these two options are both becoming more affordable, that doesn’t mean they’re suitable for every homeowner. Below, we’ll break down when the experts will say a home equity loan makes sense now – and when you might want one HELOC instead.
Are you considering accessing the equity in your home? See what rate you are entitled to here now.
Does a HELOC or Home Equity Loan Make More Sense Right Now?
I’m also not sure which of these options is best for you in today’s unique economic climate. Then consider these factors:
If you want to ride the wave of low rates: HELOC
HELOCs generally have variable ratesso the rate you get now will likely change over time. That’s not great in a time of rising rates, but when interest rates are expected to fall? Things can only get better.
“They are tied to the prime rate, which can be very beneficial during periods of low rates,” says Clint Jordan, real estate agent and founder of Mil-Estate Real Estate Network.
This has not been the case in recent history. As Darren Tooley, loan officer at Union Home Mortgage, explains, “Home equity loans have been considered a better alternative to HELOCs over the past couple of years. Now that we’re anticipating a cycle of rate cuts by the Fed, a HELOC might be a better option since every time the Fed cuts rates, your HELOC rate should drop accordingly. »
Find out what HELOC rate you would qualify for here.
If you have a specific expense to cover now: Home Equity Loan
A home equity loan might be the right choice if you have just one major expense to cover soon. It could be a home or car repair, or an unexpected bill or medical expense. Either way, a home equity loan can give you a significant lump sum to cover it.
“If you need a large lump sum for a specific expense, a home equity loan might be the best choice,” says Debra Shultz, vice president of lending at CrossCountry Mortgage. A HELOC, on the other hand, is best “if you need slow access to funds over time,” she says.
Just know: Since home equity loans are typically fixed-rate products, the rate you get when you apply for your loan will be your interest rate for the life of the loan. This means you won’t benefit from any additional rate cuts if the Fed opts to do so, unless you switch to refinance.
John Aguirre, a mortgage loan originator in Loantown, says don’t worry, though. “Rate changes will not have a noticeable impact on monthly cash flow for the majority of borrowers. You can always refinance.”
If you need low payments right now: HELOC
HELOCs work a little differently than traditional loans. Instead of paying the interest and principal in full up front, you only pay interest for the first 10 years (this is called drawing period). This makes them perfect for consumers who need cash but don’t have the funds for a huge monthly payment at the moment.
“You only borrow what you need, when you need it, and you only pay interest on what you borrow,” Shultz says.
If you want stability: home equity loan
As home equity loans Typically being fixed-rate loans, more risk-averse consumers are best served by a home equity loan in most scenarios.
“Fixed-rate home equity loans provide much more certainty than adjustable-rate HELOC loans because homeowners can know their monthly payments before taking out the loan,” says Tooley. “This allows the borrower to budget and know exactly what to expect each month.”
HELOCs don’t offer this type of predictability. And while they may allow you to take advantage of lower rates now, market conditions can change quickly. When this happens, it could mean increased payments. “This can worry a lot of people,” Tooley says.
Run the numbers
If you’re considering tapping into your home equity, it doesn’t hurt to consider all of your options: home equity loans, HELOC And cash out refinancing. Simply contact a loan officer and have them evaluate all three scenarios to see which one best fits your needs and budget. You can also use a broker to help you shop for the best rate.
