Your home is one of your most valuable possessions. It provides shelter, refuge and is where many of your cherished memories are created. It's also an asset that can generate cash, and you don't have to sell it to take advantage of that.
By, you can access the value you've built in your home to fund , from home improvements to debt consolidation. Rates on home equity products are often significantly lower than on other financing solutions, such as credit cards. And, if you use the funds for eligible home improvements, you may even be able to on your taxes.
If you're considering using your home equity to finance a major expense, the Fed'smay make this the ideal time to do so.
Why you should use home equity while interest rates are paused
After a year and a half of regular rate hikes designed to fight inflation, the Federal Reserve has pressed pause for the second time this year. Here's how it can help you if you're contemplating borrowing from your home equity.
You can lock in a lower rate
The Fed's latest pause doesn't mean rate hikes are over. Somewe've spoken with believe home equity rates have further to rise before they begin dropping in late 2024.
lock in your rate when you take them out. So, if you get one now, you can avoid having to pay more if rates do continue to increase. This can keep you from paying more in interest if rates increase after you take out your loan.
And whilehave a variable rate, taking one out now means you'll enjoy today's rates until they go back up. This can save you at least a bit on interest if you're in need of funds sooner rather than later.
You can take advantage of high home prices
Your home's value is one of the major elements in. The higher your equity, the more . And with home equity for many homeowners, now could be the right time to access yours.
"Higher inflation can also result in decreased home values," says Matt Teifke, founder and principal broker of Teifke Real Estate. "This means that if your home value drops, you may be unable to borrow as much money against it because lenders want to protect themselves from losses by ensuring the loan amount does not exceed the value of the home."
Home equity loan vs. HELOC: Which is better today?
So, which home equity product should you choose in today's rate environment? The answer, as with many financial questions, is, "It depends."
"Given the choice, I tend to lean towards a home equity loan versus a HELOC due to the variable interest rate in a HELOC and the risk that entails if interest rates rise," says Tyler Gray, CFP, managing director at Sage Oak Financial. "But either could have its place in someone's financial plan, depending on their situation."
All else being equal, home equity loans can be a smart choice for big expenses requiring a lump sum upfront, such as debt consolidation. HELOCs, on the other hand, are good for ongoing expenses like paying for a child's education. They allow you to draw from a line of credit as needed, potentially reducing the amount of money you must pay back.
"I would prefer a HELOC in today's environment because of the flexibility," Colin Zizzi, CFP, founder of Zizzi Investments, previously told. "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."
To determine thefor you, consider each one's pros and cons and weigh them against your needs and repayment ability.
The bottom line
Using your home equity to access cash can be a smart financial move, especially when interest rates are paused. But whether it's the best strategy for you depends on your unique situation. Take the time to evaluate your options and, if you decide to pursue home equity borrowing, shop around to find the best offer that fits your needs.
"It's important to bear in mind that individual lenders may respond differently to Fed rate actions, and borrowers should closely monitor their lenders' rate adjustments," says Mike Qiu, real estate agent and owner of Good As Sold Home Buyers. "Seeking advice from financial professionals is advisable when considering home equity borrowing."
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