Why Home Equity Loans Beat HELOCs in 2022
KEY POINTS
- Both a home equity loan and a HELOC let you borrow against your home.
- Home equity loans may be a better bet this year due to the way interest rates might trend.
You may want to favor a home equity loan for one big reason.
One benefit of being a homeowner is getting to tap the home equity you've built in your property. You can borrow against that equity for a variety of purposes, whether it's to fix issues with your home, make renovations, or use the money for something not related to your property, like start a small business or go on vacation.
Right now, homeowners across the U.S. are sitting on a large amount of equity due to higher home values. And you may be eager to tap yours.
If you don't want to take out a new mortgage (specifically, a cash-out refinance) to access that equity, you can borrow against your home via a home equity loan or line of credit (HELOC). Both options have their benefits and drawbacks, but you may want to favor a home equity loan this year for one big reason.
It's all about interest rates
One advantage of taking out a home equity loan over a HELOC is getting to lock in a fixed interest rate on the sum you borrow. This ensures your payments won't rise in the course of paying off your loan.
With a HELOC, you get more flexibility in the amount you borrow since you're not taking out a lump sum loan right away. Rather, you get a line of credit you can draw from over the course of what's usually five to 10 years. But HELOC interest rates can be variable, which means that once you draw from your HELOC, your interest rate could rise in the course of your repayment period.
Meanwhile, there's a good chance interest rates will rise this year on consumer products across the board. The Federal Reserve has plans to raise its federal funds rate.
Now to be clear, the Fed won't dictate what interest rate you pay on your home equity loan or HELOC because it doesn't actually establish consumer interest rates. Instead, it targets what rates banks charge each other for short-term borrowing. But the Fed's actions tend to influence consumer rates, and so this year, it's fair to assume rates will start to climb. And they may continue to climb for years after.
That's why if you're going to borrow against your home, it might pay to lock in a home equity loan -- quickly. With rates beginning to rise, you may want the security of having a fixed interest rate on the sum you borrow -- and predictable payments to follow.
How to find a home equity loan
As is the case with any loan you take out, it pays to shop around with different home equity lenders to see which ones are offering the most competitive interest rates. Also, be aware that you'll be charged fees to close on that loan, so you'll want to pay attention to those, too.
Meanwhile, with home equity levels being so high, you may be tempted to err on the side of borrowing more rather than less. But remember that falling behind on a home equity loan can have serious consequences, like potentially, in extreme situations, losing your home. Before you sign a loan, make sure you're really only borrowing the amount you need, and aren't borrowing extra.
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