Why you should get a home equity loan before the next Fed rate hike
After pausing interest rate hikes in June, the Federal Reserve seems poised to implement another rate hike at its next meeting in late July. A minimal 25-basis point hike could bring interest rates up to a target range of 5.25 to 5.50 percentage points.
Loans and lines of credit only grow more expensive for borrowers when the Fed hikes rates. Even interest charges on comparably more affordable borrowing options like home equity loans and home equity lines of credit (HELOCs) could soon rise.
Nevertheless, now is a great time for many homeowners to take advantage of home equity. Home prices have risen over the past several years, increasing the amount of equity you may currently have in your home. And with the ongoing shortage of homes on the market, investing that equity back into your house could be a good way to preserve its value and improve your living space without having to move.
But given the potential interest rate changes coming, it can pay to take action now.
Start by exploring some the best home equity loans available here now.
Why you should get a home equity loan before the next Fed rate hike
If the Fed increases its target federal funds rate range, it could have a ripple effect for any number of borrowers — including those considering tapping into home equity.
So if you're considering a home equity loan, it may be worth locking in your rate sooner rather than later. Home equity loans, unlike HELOCs, carry fixed interest rates. The rate you lock in today is what you'll pay over the entire (potentially decades-long) lifetime of the loan.
There are benefits to choosing a fixed interest rate in the long term. You'll have predictable monthly payments that you can budget for. And there's no need to worry about an increased rate leaving you with higher payments at the end of the month.
"If someone would prefer peace of mind knowing their rate won't go up, they could choose a fixed rate," Julia Colantuono, CFP, APMA, financial planner and founder of One Financial Design recently told CBS News. "And if interest rates go substantially lower they can refinance."
Home equity loans, in general, can also be ideal for homeowners with specific plans for their money, since you'll receive the loan amount as a lump sum upon approval. Find out how much you're eligible to borrow and the rates you can qualify for today!
Why you may also want to consider a HELOC
Locking in a fixed home equity loan rate before another Fed rate hike can save you money over the lifetime of your loan. But depending on how you plan to use the money you borrow, you may also want to look into whether a HELOC better fits your needs.
A HELOC is a line of credit that carries a variable interest rate. Despite the promise of higher interest in the near-term as Fed rate hikes continue, HELOCs could mean paying less over the entire lifetime of your loan. That's not only due to the potential lower rates in the future but also the ability to only draw the amount you need from your line of credit.
"I would prefer a HELOC in today's environment because of the flexibility," says Colin Zizzi, CFP, founder of Zizzi Investments. "You only pay interest on the amount of the equity line of credit that you actually draw on, whereas on a home equity loan you will be paying interest on the full amount of the loan."
By comparison, Zizzi says, "A home equity loan would have been more attractive in the low interest rate environment we saw in the past 10-15 years."
Explore home equity borrowing options available for you now.
The bottom line
Borrowing from home equity is one of the big advantages homeowners have in today's high interest rate environment. Because home equity loans and HELOCs are secured by the value of your home, you can typically score better rates than with alternative lending options (like personal loans or credit cards).
However, homeowners considering home equity as an option should be aware of an imminent Fed rate hike. It could be worth locking in a fixed home equity loan rate sooner rather than later, since your rate will remain the same the entire loan term. Otherwise, a HELOC could be another option with some added flexibility over time.
