Personal Loans vs. Home Equity Loans: Which Is Better Right Now?

High interest rate Interest rates have driven up borrowing costs over the past three years. That’s a sad reality if you have variable-rate debt or are looking to take out a loan. But that trend is starting to reverse.

“There is a near-universal expectation that rates will decline over the remainder of the year as inflation continues to moderate toward the Fed’s preferred 2% target and the job market cools, easing fears of wage-driven inflation,” says Josh Lewis, certified mortgage consultant of The Educated Homebuyer podcast.

With rate cut On the horizon, borrowing will become more affordable again. But which loan product is best this fall? home equity loans are probably at the forefront of your mind if your home value has increased during the pandemic, personal loans are sometimes the best choice. We asked a few financial experts for their recommendations, which we detail below.

Find out here now what home loan interest rate you could qualify for.

Personal Loans vs. Home Equity Loans: Which Is Better Right Now?

The costs of both types of loans will decrease as rates fall, so a personal loan or a home equity loan is better this fall will depend on the details of your situation.

When is a personal loan better?

A personal loan may make more sense in the following scenarios:

• You don’t want to put your home at risk: You may prefer a personal loan because of the lien requirements of home equity loans. “If a person defaults on a personal loan, it has no impact on their home, whereas a default on a home equity loan can put a person’s home at risk due to foreclosure,” says Shmuel Shayowitz, president and chief lending officer at Approved Funding.
• You need money fast:Brian Mollo, managing director of Trusted House Buyers, says a personal loan can be a better option when you need funds quickly, such as to cover an emergency expense. “Personal loans often have faster approval and funding processes, which can be crucial if you need money quickly,” Lewis adds.
• You have good credit and want to avoid fees:Home equity loans typically come with closing costs which range from 2% to 6% of the loan amount. Personal loans do not have closing costs, but sometimes have origination fees that can be as high as 12% of the loan amount. However, you may be eligible for a personal loan with no fees if you have good or better credit.
• You need to borrow $10,000 or less: “If you need a small amount of money for a short period of time (one to seven years) and plan to pay it back quickly, the fear of a higher interest rate may be outweighed by the speed and ease of getting a personal loan,” Lewis says. Jeremy Schachter, branch manager at Fairway Independent Mortgage Corporation, agrees. “If you’re looking for a small amount of money to pay back quickly (less than $10,000), I would recommend a personal loan over a home equity loan,” Schachter says.

Start exploring the best personal loan options available online today.

When is a Home Equity Loan Better?

Then here’s when the experts say that a home equity loan maybe better:

• You want the lowest interest rates: “Home equity loans typically offer lower interest rates, around 7 to 9 percent, compared to 10 to 12 percent or more for personal loans. If rates drop as expected, a home equity loan will likely remain more affordable,” Lewis says. Plus, you could opt for a Home Equity Line of Credit (HELOC) with a variable interest rate and take advantage of every rate cut. “In a falling rate environment, you can choose the floating rate, probably tied to the base rate, and take advantage of the decline every time the Fed cuts rates,” Lewis says.
• You want lower monthly payments: Home equity loans also tend to have longer maximum repayment terms, up to 30 years, while personal loan terms typically range from one to 10 years. “The longer repayment terms of a home equity loan can make monthly payments more manageable, especially if you expect rates to drop and want to keep payments manageable in hopes of refinancing later,” Lewis says.
• You have a lot of equity and need a larger loan amount: “Home equity loans can allow you to access larger loan amounts, making them ideal if you need significant funds for home improvements or to consolidate higher-interest debt,” Lewis says. For example, most home equity lenders allow you to borrow about 85% of the value of your homeThis could amount to a six-figure sum, depending on how much home equity you have built up to date.

The essentials

The best loan product for you this fall depends on several factors. “While a home equity loan typically offers more benefits in terms of lower interest rates and higher borrowing limits, a personal loan can be beneficial in certain situations, particularly when quick access to smaller funds is needed, or when you want to avoid putting your home and equity at risk,” Lewis says.

To find the most suitable solution, consider the above factors and do the calculations.

Personal loans and home equity loans can have a significant impact on your financial situation. If you have questions or would like personalized advice, consider consulting a licensed financial advisor. They can help you explore your options. Advantages and disadvantages of the two options in more depth.

Learn more here now.