Should you get a home equity loan now?
As the effects of inflation and rising interest rates carry on into 2023, many people are looking for ways to better manage their finances. Perhaps you've gone into credit card debt, for example, or you're looking for some breathing room in your monthly budget.
For homeowners, one option to consider is a home equity loan. Often called a second mortgage, a home equity loan lets you borrow cash based on the equity you have in your home.
Keep in mind that while the names are very similar, a home equity loan differs from a home equity line of credit (HELOC). A home equity loan works like a mortgage that you pay back over time, whereas a HELOC works somewhat like a credit card with a borrowing period that generally differs from a repayment period.
With a home equity loan, typically you can borrow up to 85% of your home's value, minus current mortgage debt. So, on a $1 million home with $200,000 left on a mortgage, you might be able to borrow up to $650,000. The specifics, however, depend on your personal circumstances and where you borrow from. Some lenders might allow for higher or lower home equity loan limits.
If you think you could benefit from taking out a home equity loan then start by checking your eligibility here now or use the table below to explore your local options.
Should you get a home equity loan now?
Why would a homeowner borrow money from their home? While it's not a decision to take lightly, some of the top home equity loan benefits that you may want to consider include:
Opportunity to benefit from real estate boom
The recent real estate boom means there's a good chance that your home is worth far more than it was pre-pandemic. If you don't want to sell your home, you can still benefit from your home's higher appraised value by taking out a home equity loan.
You'll still have to pay that money back, with your home serving as collateral, so you might not want to use home equity loan funds to splurge on unnecessary items. However, you might benefit from accessing those funds to renovate your home or manage a period with a loss of income, for example.
Fixed interest rates
Home equity loans typically have fixed interest rates. While borrowing costs are generally high right now across the board, locking in a fixed interest rate on a home equity loan could be helpful if you have higher-interest debt, like on credit cards.
If you can pay off that higher-interest balance first and then pay off your home equity loan, you could come out ahead, especially if rates continue to rise. Other borrowing options, like HELOCs, could have variable rates, meaning you won't know what your payments would look like down the road.
Explore your home equity options online today to see if it's right for you.
Another home equity loan benefit is that you can get the money as a lump sum, rather than in stages. With a lump sum, you might have a large amount of money that gives you flexibility, such as to make other investments.
While making other investments with a home equity loan can increase your risk, it's possible that you'd find one that pays a higher return than your fixed interest rate on your home equity loan, thereby earning you money on a net basis.
May be tax-deductible
A home equity loan, like some other forms of real estate borrowing, can offer tax advantages that you might not get with, say, a personal loan. Specifically, the interest you pay on a home equity loan may be tax-deductible if you use the funds to "buy, build, or substantially improve" the home that secures the loan, as the IRS explains.
Be sure to check IRS rules and consider consulting with a tax advisor for clarification.
The bottom line
While there are many potential home equity loan benefits, not all borrowers come out ahead. For one, if you can't get a good interest rate on a home equity loan, then the borrowing costs might outweigh the benefits. Some homeowners might prefer waiting to see if interest rates come down.
Consider shopping around for different types of loans to see what works for your circumstances. You may also want to speak with a financial advisor who can help you weigh which financial moves are appropriate for you. You can easily explore your home equity loan options here now or search the table below for some local offers.
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