Borrowing from your home equity? Avoid these 3 big mistakes
With mortgage rates at a 23-year high and the benchmark interest rate higher than it's been in 22 years, it's clear that homeowners looking to move or refinance their existing homes have limited (and expensive options). In a market like the current one, many owners may be better served by turning to their existing homes and exploring ways to repair or renovate their surroundings. Fortunately, there are still relatively low-rate credit options available that can help facilitate this work.
That said, to effectively borrow from home equity, owners should first familiarize themselves with their options — and know what mistakes to avoid in advance. Start by exploring your home equity loan options here now to learn more.
3 big home equity mistakes borrowers should avoid
Borrowing from your existing home equity can be a smart move to make, particularly in today's inflationary environment. To get the greatest return on your loan, however, be sure to avoid these three big mistakes.
Not exploring all of your options
There are many ways to borrow from your home equity, ranging from home equity loans and home equity lines of credit (HELOCs) to cash-out refinancing and reverse mortgages for seniors. Each has its own pros and cons, some of which may be more favorable for your personal financial situation than others. So, do your research and thoroughly explore all of your options before signing on the dotted line.
Remember, in these instances, your existing home will serve as the collateral for any loans. As such, it's vital that you get the most cost-effective and affordable option otherwise you could risk a loan default — and the loss of your home.
Start exploring your home equity loan and HELOC rates here to learn more.
Using it for the wrong reasons
Home equity loans and HELOCs are better to use in certain circumstances than a reverse mortgage or cash-out refinance. The former two options, for example, are better suited for major home renovations or repairs. If used for these reasons, owners may be able to deduct the interest they paid on the borrowed amount from their annual taxes.
The same cannot be said for a reverse mortgage or a cash-out refinance. That doesn't mean that those options aren't also valuable, just that they may be better for those who are looking for cash to pay major expenses or pay off debt versus big home projects.
Not shopping around
When it comes to financial products and services, it pays to shop around to find the best rates and terms. This is especially true for home equity borrowers. Homeowners are not restricted to the current bank that holds their mortgage loan. They can — and should — shop around to see if there are other banks and lending institutions that can offer them a better deal. And then they should return to the original lender to see if they can match or surpass it. Experts recommend getting quotes from at least three lenders before committing to a final one, although you could shop around for more to establish a firmer baseline to compare against.
The bottom line
With elevated interest rates making everything from new mortgage loans to credit cards more expensive, homeowners find themselves with limited options. In this environment, owners should consider utilizing their home equity instead. To do so effectively and inexpensively, they should explore all of their options to find the one most suitable for their needs.
They should also be sure to use the home equity for the right reasons, as there could be favorable tax consequences if they do. Finally, as with almost all financial products and services, owners will be better served by shopping around to find a servicer with the lowest rates and best terms and conditions.
