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Why home equity borrowing is cheaper than other options

Your home may offer you a way to access significant sums of money at a low interest rate. Getty Images/iStockphoto

Inexpensive borrowing options have been scarce in recent years. Thanks to a combination of high inflation and a series of interest rate hikes designed to keep it from rising further, consumers have been stuck paying significantly more. And few options have been exempt, with rates on mortgages, personal loans, credit cards and home equity loans considerably higher than they were just a few years ago. 

Home equity loans and home equity lines of credit (HELOCs), however, offer significantly lower interest rates than most alternatives, both before the latest inflation surge and right now. And there's a significant chance that they could become even cheaper in the weeks and months to come. 

But why do these credit options come with lower interest rates — and, more importantly, how can you secure the cheapest one right now? We'll break down answers to both questions below.

See what home equity loan interest rate you could secure here today.

Why home equity borrowing is cheaper than other options

There's a simple reason why borrowing from your home equity is cheaper than borrowing in a myriad of other ways. Because your home serves as collateral in these circumstances, lenders consider you to be more likely to pay back what's been borrowed than you may have been if you took out unsecured debt like a credit card or personal loan. 

With home equity borrowing, your debt is considered secured because your existing home is the source of funding. If you fail to pay back what you borrowed, you could lose your home in the process. Because of this structure, in which the chance of default tends to be lower, lenders generally feel more comfortable providing a lower interest rate than they do otherwise. 

That doesn't mean that home equity borrowing is exempt from the larger rate climate, however. As rates adjusted upward in recent years, so did the cost of home equity loans and HELOCs. But because of their inherent structure, they've been much more cost-effective than personal loans (with average interest rates near 12% right now) and credit cards (with average rates of 21%). 

In comparison, today's home equity loan and HELOC interest rates are both under 9% right now. And if inflation continues to fall, as it has in both April and May, a cut to the federal funds rate becomes more realistic, and rates on home equity loans and HELOCs would fall even further. 

Start exploring home equity loan rates and lenders online now.

How to get a cheap home equity loan now

There are multiple ways to secure a cheap home equity loan now, but it will take some work and patience on behalf of the homeowner. Here are three ways to pay less on your loan:

  • Shop around: Not every lender will offer the same rate and terms (and you can use a different bank than the one you have your mortgage with). So be sure to shop around to find the cheapest options available.
  • Skip a HELOC: While HELOCs can have lower rates than home equity loans, the latter has a slight edge right now. But, more importantly, that lower rate is fixed while HELOC rates are variable and subject to go up or down as the rate climate evolves. 
  • Boost your credit: While home equity borrowing is different from other credit options, it still operates the same way in that lenders will only offer the best deals to those with the highest credit scores and cleanest credit histories. So, if you want to pay less, first make sure to improve your credit as much as possible. 

The bottom line

In an evolving rate climate in which cuts look inevitable — but where rates are still high now — borrowers need to be judicious with how they borrow. Fortunately, home equity borrowing offers a relatively cheap way for homeowners to access extra cash. Because their home serves as collateral in these scenarios, lenders tend to offer lower rates than they would for other, unsecured borrowing transactions. But it's still important to do your due diligence to secure the best option by shopping around, choosing a HELOC over a home equity loan and improving your credit as much as possible. Finally, because of the unique nature of home equity, make sure to only borrow exactly what you need so that you can easily pay it back and avoid the risk of losing your home in the process. 

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