Should you lock a home equity loan rate with inflation increasing again?
The cost of borrowing may stay higher for longer. That was one of the key takeaways for Americans on Wednesday when the Bureau of Labor Statistics released its latest inflation reading, this time for January. That report showed inflation rising to 3%, marking its fourth consecutive monthly rise. Now a full point over the Federal Reserve's target 2% goal, Wednesday's reading all but ensures higher interest rates for longer – and it may eliminate any chances that the Fed will proceed with rate cuts this year.
While higher inflation and elevated interest rates may be favorable for savers, they're problematic for borrowers already contending with high rates on a series of products. But that doesn't mean that there still aren't cost-effective ways to borrow money now. Borrowers will just need to be a bit more strategic in their approach, and for homeowners, that may mean locking in a low home equity loan rate right now. Below, we'll explain why.
Start by seeing what home equity loan rate you could qualify for here.
Should you lock a home equity loan rate with inflation increasing again?
If you're a homeowner interested in borrowing from your home equity, then, yes, it makes sense to lock a home equity loan interest rate with inflation rising again. Assuming you have good credit and can qualify for a reasonable rate and term, locking a home equity loan rate at today's average of 8.45% can be advantageous. Here's why:
It will protect you against rate hikes
While additional hikes to the federal funds rate (thus causing a rise in home equity loan interest rates) don't appear imminent, they also don't appear as unrealistic as they may have just a few months ago. Inflation has now risen in October, November, December and January. There are unlikely to be many more months of rises without the Fed taking action.
But locking in today's relatively low home equity loan rate will protect against that increasingly possible scenario. And while home equity line of credit (HELOC) rates are slightly lower now (averaging 8.28%), those rates are variable and positioned to change each month, perhaps in an upward way if inflation can't get back under control. Considering this, borrowers should instead look to lock in a home equity loan rate now.
Get started with a home equity loan here.
It will allow for precise budgeting
In a still unpredictable economic climate, with inflation making everyday expenses more costly and the future of interest rate cut relief even murkier now than it had been in January, it's critical that borrowers can precisely budget their loan repayments. A HELOC, with a rate set to change independently each month for borrowers, doesn't offer that ability.
A locked home equity loan rate, which will remain fixed in the face of this uncertainty, will. This ability to precisely budget is particularly important when using your home as the funding source, as you could lose it to the lender should you fail to make your repayments. But you'll reduce the chances of that happening if you know exactly what you'll owe each month, even if rates and inflation do rise in the future.
It won't prevent you from securing lower rates in the future
Home equity loans can be refinanced. So waiting for rates to fall or even simply waiting to see how the latest inflation reading reverberates throughout the wider rate climate isn't necessary. Instead, borrowers should strongly consider locking in a low rate while it is available right now and look to refinance it when the rate climate stabilizes and cools in the future. Just remember that home equity loan refinancing comes with closing costs, so be prepared to wait until rates fall around a full point lower than what can be secured now.
The bottom line
With the average home equity loan rate much lower than alternatives like credit cards and personal loans and with the growing potential for home equity loan rates to rise, many homeowners could benefit from locking in a rate now. This will protect against future rate hikes and allow for precise budgeting, all while providing a funding source that many homeowners require right now.
Have more home equity loan questions? Learn more about your options here.
