Why you should get a home equity loan in 2024
With inflation still higher than economists would like and interest rates elevated to combat it, you might be tempted to whip out the credit cards to cover expenses. And while that's certainly an easy option, it's probably not the most economical.
The average rate on credit cards is currently around 20%, so putting anything on those cards could mean a hefty bill later on. Fortunately, if you're a homeowner, there may be a better option: a home equity loan.
With home equity loans, you can borrow money from your home based on the amount of equity you have in it, and the loan is typically offered at a much lower rate than what you'd get with credit cards or other lending products. The average home equity loan rate is just 8.59% as of March 29, 2024.
Find out the home equity loan rates you could qualify for here.
Why you should get a home equity loan in 2024
Do you own a home? Here's why you might want to get a home equity loan this year.
To pay off credit card debt
Since home equity loans have much lower rates than credit cards, they can be a smart option for paying off credit card debt. When you do this, you essentially trade the card's higher interest rate for the home equity loan's lower rate, reducing your monthly payments as well as the long-term interest costs you'll face.
Doing this can also allow you to pay off debt quicker, according to Kendall Meade, a certified financial planner at SoFi.
For example, she says, if you had a $20,000 credit card balance at a 20% rate and made $400 payments each month, you'd pay off the debt in 108 months with a total of $43,360 in costs ($23,360 just in interest). If you used an 8% home equity loan and paid $405 per month, you'd pay that same debt off in just five years — and save more than $19,000 in the process.
Learn about your top home equity loan options online today.
To cover the cost of home or auto repairs
If you need to repair your car or fix up your house, home equity loans can also be a good choice.
"If you have repairs that must be done on your home and you don't have the cash available, then this may be your next best option," Meade says. "Examples include needing a new roof or HVAC system."
It can be particularly smart to use home equity funds on repairs that improve the value of your house, as that can mean more profits once you sell later on.
Additionally, using your home equity loan proceeds toward improving your home may qualify you for a valuable tax deduction. According to IRS rules, you can write off the interest you pay on home equity loans, so long as you use the money to "buy, build, or substantially improve" your house.
To cover the cost of medical expenses
You may also want to use a home equity loan to cover the cost of sudden medical bills or expensive treatments you might be facing. While health insurance can help with some of these costs, a home equity loan could offer a way to pay for things like deductibles, co-pays and other expenses — at least until you reach your policy's out-of-pocket max.
To pay for school
Home equity loans can also help you pay for education costs — things like college or private school tuition, books, supplies, housing and more.
You'd likely only consider this if you aren't eligible for federal student loans or you've exhausted all those you have available, as federal student loans tend to have lower rates than most home equity loans.
Still, home equity loan rates are often lower than private student loan rates, so using a home equity loan to pay for school may save you money if a private student loan and home equity loan are your only options.
To fund your business
If you own a business or are looking to start one, you might consider a home equity loan to fund your ventures, as it will likely come with lower rates than a business loan would. Just make sure you'll have the funds to pay it back, as skipping your home equity payments could put your home at risk of foreclosure.
"For business owners in need of additional capital for growth, a home equity loan may be the smart move," says Mike Roberts, CEO of City Creek Mortgage in Draper, Utah. "If you run the numbers and are confident when putting your home on the line, you're likely to save more on interest."
How to get the right home equity loan
If you opt to pursue a home equity loan, you should make sure you have enough equity to qualify. Most lenders require you to have at least 10% to 20% equity in your home before they'll allow you to take out a home equity loan. This means your current mortgage balance can't amount to more than 80% to 90% of your home's value.
If you have that much equity, then start by comparing at least a few home equity lenders. Look at their rates, fees, closing costs and loan terms, and be sure to read past customer reviews, too. You may also want to compare it to other equity options — like home equity lines of credit (HELOCs) or cash-out refinances — to be sure you're getting the best deal.
