Here's Why a Home Equity Loan May Be Less Affordable Than You Think

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KEY POINTS

  • A home equity loan can be fairly easy to qualify for if you have enough equity in your property.
  • Since borrowing rates are up on the heels of Federal Reserve rate hikes, you might get stuck with a higher rate on a home equity loan than you'd like.

You may need money to fix up your home or move forward with a renovation you've been putting off. Or you may need money for something having nothing to do with your home at all. In that scenario, you have different options. You could look at taking out a personal loan, which allows you to borrow money for any purpose. But if you have a decent amount of equity in your home, you may want to tap it by taking out a home equity loan instead.

You might manage to snag a lower interest rate on a home equity loan than a personal loan because the former is secured by your home itself. Personal loans, by contrast, are unsecured. Also, if your credit score isn't the best, you may have more luck taking out a home equity loan because your lender might care more about what your property is worth than whether your score is in great shape.

But while a home equity loan can generally be a fairly affordable way to borrow money, right now, that may not be the case. So before you sign one of these loans, you may want to consider the benefits of waiting to borrow in general.

It's gotten expensive to take out a loan

These days, no matter what sort of loan you're looking at, you might end up with a much higher interest rate than you would've snagged a year ago. This holds true even if you happen to have really great credit.

The reason? The Federal Reserve had raised interest rates nine times over the past year and change in an effort to slow the pace of inflation. Now, the Fed doesn't set consumer borrowing rates directly. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term loans.

But when the Fed raises its federal funds rate, it tends to drive up the cost of consumer borrowing across the board. So right now, you might end up with a higher interest rate on a home equity loan than you'd like by virtue of applying at a time when it's gotten expensive to borrow.

Should you wait to borrow money right now?

If you need to replace your car, then an auto loan is probably unavoidable. And if your rent keeps going up and you're ready to take the leap into homeownership, then you may want to move forward with a mortgage, even if that means getting stuck with a higher borrowing rate.

If you're not sure what to do in terms of taking out a home equity loan, ask yourself how pressing your need for money really is. If you're looking to renovate, can you cope with your home in its current state for another year or two? If not -- say, your kitchen appliances really need to be replaced and you need to expand that room to have decent countertop space -- then it could pay to take on a higher borrowing rate to get your money sooner.

However, if your need for money isn't really so immediate, and waiting to borrow won't hurt you, then it could pay to sit tight a while longer. This holds true whether you're thinking of taking out a home equity loan or any other type of loan that gives you flexibility with your proceeds.

Our Research Expert

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