The bottom line A home equity loan or HELOC can help you get through the financial troubles the recession brings without resorting to high-interest financing options like credit cards or personal loans.
If you're using a HELOC to borrow against your home's equity, a significant decline in home values could cause your lender to reduce your line or even institute a HELOC freeze — as some homeowners learned during the Great Recession.
If the value of your home drops significantly, your lender may decrease your HELOC limit to reflect the reduced equity or freeze your HELOC account altogether. A housing market crash may also cause you to default on your HELOC if you owe more on your home than it's worth.
The timing behind financial considerations is a personal one but, for many homeowners, now can still be a good time to take advantage of their existing home equity. Home equity loans and HELOCs still currently have lower interest rates than many popular credit options.
In October of 2023, Bankrate data showed rates were averaging 8.75 percent on home equity loans and 9 percent for HELOCs. There is one bright spot, though: If you use a HELOC or home equity loan for housing-related repairs or remodels, the interest can be tax-deductible. That can reduce the real cost of your financing.
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.
The most obvious downside to a HELOC is that you need to use your home as collateral to secure your loan. In today's rising interest environment, the fact that HELOCs have variable interest rates is also less advantageous, as the Federal Reserve has indicated that it will need to keep interest rates higher for longer.
One of the most intriguing ways to use a HELOC for wealth-building is to invest in income-generating assets. You can use the funds from your HELOC to invest in real estate, stocks or other income-producing investments.
Though consumer rates have been relatively high so far this year overall, HELOCs are often more affordable than other options like credit cards or personal loans. Plus, rates are expected to drop later in 2023.
A second mortgage is a home-secured loan taken out while the original, or first, mortgage is still being repaid. Like the first mortgage, the second mortgage uses your property as collateral. A home equity loan and a home equity line of credit (HELOC) are two common types of secondary mortgages.
If you've been thinking about accessing your home equity, it may be wise to do so before a recession limits your options. A home equity loan or HELOC can help you get through the financial troubles the recession brings without resorting to high-interest financing options like credit cards or personal loans.
Having a HELOC won't prevent you from being able to sell your home. You'll need to repay that HELOC before you see any money from the sale of your home. Paying it off early could come with penalties, so review the paperwork you got when you opened your HELOC to see if yours does.
You can freeze or terminate your HELOC yourself. You might need to in certain situations. For instance, you might send your lender one before selling your house. A HELOC is a lien against the property, so you must settle it before transferring the title.
As additional debt, it can ding it — but can also boost it as an enhancement of your total available credit. Basically, a HELOC's impact on your credit score usually comes down to how you manage the account.
Because HELOCs usually have variable interest rates, the cost of borrowing can rise or fall with the federal funds rate. If the fed funds rate goes up, your HELOC gets more expensive. Home equity loans, on the other hand, come with fixed rates, so they aren't as deeply impacted by fed funds rate movement.
Every 50 basis point reduction lowers HELOC interest costs by $500 per year for every $100,000 borrowed," says Green. Mike Hardy, managing partner at Churchill Mortgage, agreed saying, "All economic indicators point toward a decrease in interest rates in 2024.
U.S. Bank's HELOCs have APRs that range from 8.95% APR to 13.10% APR as of December 1, 2023. Its starting rate was comparable to the national average at the time.
3. Rental Properties. Owning a rental property could be one of the most profitable ideas for how to invest $200,000 for monthly income over the long term. You could invest your $200,000 towards the purchase of a rental property, then collect rental income for as long as you hold it.
Home equity line of credit requirements can vary by lender, but you typically need more than 15% to 20% equity in your home, a debt-to-income ratio below 50% and a credit score above 680 to qualify.
If you intend to use the cash over a period of time, a HELOC may be your best option. This option allows you to withdraw the cash as and when you need it or not use it at all. A HELOC is often used as a backup strategy for example if you lose your job. If you don't use the money, you don't pay interest.
Apply for a HELOC
If you're approved, the lender will provide you with details about the credit limit, interest rate, draw period and repayment terms for which you qualify. You can then use the line of credit to pay off your credit cards.
Example 1: 10-year fixed-rate home equity loan at 8.75%
If you took out a 10-year, $100,000 home equity loan at a rate of 8.75%, you could expect to pay just over $1,253 per month for the next decade.
Now let's calculate the monthly payments on a 15-year fixed-rate home equity loan for $20,000 at 8.89%, which was the average rate for 15-year home equity loans as of October 16, 2023. Using the formula above, the monthly principal and interest payments for this loan option would be $201.55.
Is 3.5% a good HELOC rate? In today's market, 3.5% would be an uncommonly good HELOC rate. Since 3.5% would currently fall below the Federal Funds Rate, lenders couldn't offer this rate on any home loan without losing money.