3 home equity borrowing options that let you keep your low mortgage rate
For many current homeowners, holding onto the ultra-low mortgage rates secured during the pandemic is a top priority. During that time, mortgage rates were hovering below or near 3% at that time, so many homeowners would prefer to avoid a loan at today's mortgage rates — which currently average over 7% for a 30-year fixed mortgage. After all, a 7% mortgage rate would result in much higher monthly costs and interest charges over the life of the loan, even when borrowing a similar amount.
However, mortgage rates aren't the only thing that has soared over the last few years. Home values have skyrocketed, too, and the average homeowner with a mortgage now has nearly $300,000 in home equity, about $206,000 of which is tappable. This gives homeowners an affordable borrowing option for major expenses like home renovations or repairs, education costs, business investments or debt consolidation.
That said, it's important to understand what you're getting into if you want to retain your current low mortgage loan rate while borrowing from your home equity. After all, some equity access methods, like cash-out refinancing, require you to give up that coveted low mortgage rate. Not all do, though. Some alternatives will let you tap into your home's equity while keeping your existing low-rate loan intact.
Explore your top home equity borrowing options online now.
3 home equity borrowing options that let you keep your low mortgage rate
There are several options homeowners have for borrowing against their home equity while retaining the low mortgage rate they acquired during the pandemic, including:
A home equity line of credit
A home equity line of credit (HELOC) is a revolving line of credit that is secured by the equity in your home. You can borrow against the line of credit as needed (up to the credit limit), and the interest rate is typically variable, adjusting periodically based on market conditions.
A big benefit of HELOCs is that these borrowing products can be a flexible alternative to lump-sum borrowing. With a HELOC, you draw funds from the line of credit as needed, only paying interest on the outstanding balance rather than the full line amount.
And, while HELOC rates can fluctuate over time based on market conditions, the average rates are currently lower than many other borrowing options, like credit cards. For example, the average HELOC rate is currently just over 9%, but the average credit card rate hovers over 21% right now.
So, even with the variable rate component, opting for a HELOC over a personal loan or a credit card would be preferable for most homeowners. And, so would the fact that a HELOC allows you to retain your original mortgage rate rather than swapping it out for a new one.
Explore the HELOC and home equity loan borrowing rates you could qualify for here.
A home equity loan
With a home equity loan, you borrow money via a lump-sum loan that is secured by the equity in your home. The interest rate is usually fixed, and you repay the loan over a set term, which can range from five to 30 years or more.
One big upside to opting for a home equity loan is that the interest rates on these loans are locked in for the full repayment term. And, because this type of home equity loan functions as a second mortgage rather than replacing your current mortgage, you won't have to worry about giving up the low mortgage rate you currently have.
Another benefit to opting for a home equity loan is that the rates on these types of home equity loans average 8.61% currently. So, as with HELOCs, home equity loan rates are a lot more affordable than many of your other borrowing options right now.
A home equity sharing agreement
If you're a homeowner who's hesitant to take on new loans, a home equity sharing agreement is an alternative equity investment model offered by some specialized providers. With these products, homeowners receive a lump sum cash payment by selling a share of their home's future appreciation value when they eventually sell the property.
While fees for these arrangements can be steep, opting for one helps you avoid going into more debt — and you won't have to trade in your current mortgage loan rate to get access to the funding. In turn, it could be worth considering in the right circumstances, but you'll need to do your homework to understand exactly what you're getting into.
The bottom line
By exploring the home equity borrowing options outlined above, you may be able to leverage the equity you've built up in your home while retaining your low mortgage rate that was secured during the pandemic era. And, that can be a significant benefit in today's high-rate environment, especially if your current mortgage rate is hovering near 3% — as current mortgage loan rates are over twice as high. But before you make any moves, it's essential to carefully consider the costs, risks and long-term implications of each home equity loan borrowing option before deciding which one is the best fit for your financial situation.
