Thinking of Getting a HELOC? Here's Why Now May Not Be the Time
- A HELOC lets you borrow against the equity you have in your home.
- While home equity levels are high right now, so are borrowing rates.
- It is likely a better idea to borrow with a fixed interest rate rather than take a risk on a variable interest rate product like a HELOC.
You may want to put that application on hold.
When you need money, whether to renovate your home, fix your car, or use for another purpose, you may be tempted to borrow against the equity you have in your home. Your equity is measured by subtracting your mortgage balance from your home's value. If your home is worth $500,000 and you still owe $350,000 on your mortgage, you have $150,000 worth of equity to work with.
Now there are a few options you can look at when borrowing against home equity. You could sign a home equity loan, where you borrow a specific amount and pay a fixed amount of interest on it, or you could take out a home equity line of credit, or HELOC.
A HELOC gives you access to a credit line you can tap as needed within a certain period of time. But while HELOCs are often hailed as an affording borrowing option, right now, that's not necessarily the case.
HELOC rates just reached a high
The average rate on a 20-year HELOC just hit a new high of 9.35%. And so if you sign one now, it could end up costing you a lot.
Now it's worth noting that the average rate on a 10-year HELOC is only 5.56%, and that's actually down a bit from the previous week. But that gives you a shorter time frame to draw from your HELOC.
But it's not just current HELOC rates you need to worry about. The Federal Reserve is meeting this week and is likely to move forward with another interest rate hike. That's on top of the aggressive rate hikes that have already come down the pike this year. If interest rates continue to rise, HELOC borrowing could become even more expensive.
See, unlike home equity loans, HELOCs don't come with fixed interest rates. Rather, those rates are variable, which means they can climb over time, making your HELOC payments more expensive.
You may want to skip the HELOC
Given that interest rates have the potential to skyrocket in the coming months, you may want to limit yourself to a loan product with a fixed interest rate attached to it. That could mean signing a home equity loan or looking into a personal loan.
Like home equity loans, personal loans allow you to borrow money for any purpose. And if you have great credit, you might score a pretty competitive rate on a personal loan.
Also, when you take out a personal loan, your home isn't used as collateral. And that might give you some peace of mind.
It's never a good idea to fall behind on loan payments of any sort. But if you fall behind on a home equity loan or HELOC, you run the risk of losing your home. That won't happen with a personal loan because these loans aren't secured by that asset. And while defaulting on a personal loan isn't advisable, as it could wreck your credit for many years, at least it won't mean losing the roof over your head.
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