Will a home equity loan or HELOC be better for May?
Do you need access to funding to cover a large expense? Whether you need to make home renovations, pay off high interest debt or cover any other of an unlimited number of possible expenses, you may be thinking about leaning on your home equity.
After all, if you're like the average American homeowner, you have about $299,000 worth of equity in your home. And, on average, American homeowners can maintain a comfortable 20% stake in their homes, even after tapping into $193,000 worth of that equity.
But, if you're thinking about accessing your equity, it's important that you carefully consider your options. Home equity loans and home equity lines of credit (HELOCs) are two common home equity borrowing options. But which of these is better in today's economic environment? That's what we will break down below.
Compare your home equity borrowing options now!
Will a home equity loan or HELOC be better for May?
Home equity loans are fixed lending products. So, when you take one out, you can access your equity in one lump sum with a fixed interest rate and payment.
HELOCs are a variable home equity lending product. These lines of credit come with a draw period in which you're able to access your equity up to a predetermined limit while typically making interest-only payments. Following the draw period, you'll enter the repayment period, during which you'll make payments toward interest and your principal balance. However, because the interest rates and payments on HELOCs are typically variable, your payments may rise or fall over the life of your credit line.
But, in today's economic environment, a home equity loan may be your better option. Here's why:
Home equity loans usually come with lower interest rates than HELOCs
In today's high interest rate environment, it's important to save on interest when and where possible. Home equity loans may give you a way to do so when compared to HELOCs. In fact, the average home equity loan interest rate is currently 8.63%. The average HELOC interest rate is just shy of a half-point higher, at 9.10%. Though a 0.47% difference may not seem like much, it can amount to significant savings - especially if you plan on tapping into a large amount of your equity.
Take advantage of the competitive interest rates that home equity loans typically come with today.
HELOC rates could rise ahead
The difference between fixed and variable rates is an important one to consider in today's inflationary environment. That's because rate hikes are the Federal Reserve's most powerful weapon against inflation. And with inflation coming in hot so far in 2024, there's a possibility that the Fed could increase its federal funds rate soon (the benchmark rate consumer interest rates are often based on).
"Rising inflation is concurrent with rising interest rates," explains Alex Blackwood, CEO and co-founder of the real estate investment platform, mogul club. "A home equity loan offers a fixed interest rate." That fixed interest rate means your rate will stay the same regardless of the state of inflation and any moves the Fed may take to combat it ahead.
"The interest rate on a HELOC is flexible, and inflation may cause it to rise," says Blackwood. That could become a painful reality in today's inflationary environment.
Home equity loans are easier to budget for than HELOCs
Budgeting for fixed expenses can be easier than budgeting for variable costs. That's yet another reason home equity loans may be better than HELOCs against today's economic backdrop.
As inflation persists and prices continue to rise, budgeting may already be getting more difficult than it was in the past. But, adding a payment that has the potential to change over time, like a HELOC payment, to your budget only adds to that difficulty.
What if your HELOC payment does rise ahead? Will your budget be able to absorb the additional cost? If you choose a home equity loan over a HELOC, your payment will be the same every month, regardless of any changes to overall interest rates.
Find out how affordable a home equity loan could be today.
The bottom line
HELOCs and home equity loans are both valuable financial products. But, considering today's economic landscape, a home equity loan may be your better option this May. Not only do home equity loans typically come with lower interest rates than HELOCs to start with, those interest rates are usually fixed. On the other hand, variable HELOC interest rates may rise ahead and variable payments could be difficult to budget for. Compare your home equity loan options today to take advantage of fixed rates and payments when you tap into your equity.
