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.
Lower interest rates
While home-loan interest rates overall have risen dramatically since 2022, HELOC rates still tend to be lower than those on credit cards and personal loans. If you qualify for the best rates, a HELOC can be a less expensive way to consolidate debt or finance a home renovation.
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.
"For someone looking to tap home equity, now is a good time to look into it, considering that home values might not get much better for the foreseeable future," says Michael Micheletti, chief marketing officer at home equity investor Unlock. Learn more about the home equity loan rates available to you here.
The more equity you have in your home the more you'll be eligible to take for a HELOC. So if you can wait and put more money toward your mortgage you'll put yourself in a better position than if you acted as soon as you hit the 15% to 20% threshold many lenders prefer you to be at.
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.
But they've had a bumpy ride: In November 2023, the average HELOC interest rate eclipsed 10 percent — the highest HELOC rate in over 20 years, according to Bankrate's national survey of lenders. However, to round out the month, HELOC rates have dipped down to an average of 9.27 as of Jan. 31.
While mortgage originations in the U.S. have continued a steady decline, as a result of high mortgage rates, lenders expect HELOC debt to increase 8.2% this year and 9.9% in 2024, on an annual basis. Lenders expect home equity loan debt to increase 11.4% in 2023 but decrease 5.6% in 2024, according to the report.
In 2023, all tracked states have seen HELOC activity decrease compared with 2022. Notably, California posted the highest approved HELOC amount, surpassing $9 billion so far 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.
Borrowers often wonder if they can pay off their home equity line of credit (HELOC) early. The short answer? A resounding yes, because doing so has many benefits. If you're making regular payments on your HELOC, you may be able to pay off your debt sooner, so you're paying less interest over the life of the loan.
You can deduct interest on a home equity line of credit (HELOC), but only if you use the funds for home improvements. The introduction of the Tax Cuts and Jobs Act (TCJA) eliminated deductions on interest if you use the funds for anything else, such as to consolidate debt.
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.
Even with high rates of home equity, borrowers are more likely to take out a second loan to pull cash out, rather than lose their low rate through a cash-out refi. Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home's equity.
Online searches for “HELOC” (home equity line of credit) rose 305 percent this year, reaching an all-time high in July 2023, according to a Google traffic analysis by real estate platform RubyHome. People aren't just looking, though — a lot of them are moving forward with an application.
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.
So long as the central bank keeps interest rates steady, experts think HELOC rates will stay roughly where they are in the near term, though they should get less expensive later in the year. The Fed is projecting three interest rate cuts in 2024, with the timing depending on inflation and other economic data.
In short, a credit union is an ideal choice when it comes to home equity loans. Pick an institution that has a fixed rate option available up to 80% and flexible terms on outstanding rates. These will help you address countless possibilities in future.
Example 2: 20-year fixed-rate home equity loan at 8.85%
So, for a 20-year, $100,000 home equity loan, you could expect a slightly higher rate than on a 10-year term. In this case, let's say you qualified for an 8.85% rate. This would result in a monthly payment of $890 — much lower than the payment on a 10-year term.
Example 2: 15-year fixed home equity loan at 9.07%
As of December 21, 2023, the average national rate for a 15-year loan was nearly the same as for a 10-year loan: 9.08%. With that rate and term, you'd pay $764.27 per month for the loan.
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.