Home equity loan mistakes to avoid this month
With inflation sticky and interest rates at their highest point in decades, few cost-effective borrowing options are available for Americans right now. Credit cards and personal loans come with average rates in the double digits and mortgages are hovering near their highest point since 2000. Homeowners, however, do have one relatively inexpensive way to borrow cash — their home equity. By applying for a home equity loan or home equity line of credit (HELOC), owners can potentially access hundreds of thousands of dollars.
But in an evolving interest rate climate and with inflation more stubborn than most had anticipated at this point in 2024, this form of borrowing needs to be approached judiciously. So, homeowners should know which steps to take this May — and which mistakes to avoid. Below, we'll break down four home equity loan mistakes to avoid this month.
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Home equity loan mistakes to avoid this month
Here are four simple home equity loan mistakes owners should avoid making this May.
Waiting for rates to drop
Whether you choose a HELOC or home equity loan, you'll be able to get an interest rate under 10% right now (assuming you have a good credit score and borrower profile). But rates on both borrowing options change daily. And with the prospect for interest rate hikes more realistic at this point than many had anticipated, it's risky to wait for rates to drop further.
Instead, consider locking in a home equity loan rate today. If rates rise in the future, you'll already be secure with the lower option. And, if they drop significantly, you can always refinance at that point. Just don't wait for rates to fall — because they may not.
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Choosing a HELOC over a home equity loan
While HELOCs and home equity loans both allow owners to access their home's cash value, they operate in distinct ways. HELOCs, for example, operate as a revolving line of credit while home equity loans are simple loans disbursed in one lump sum. HELOCs also come with variable interest rates, however, which is a con in today's unpredictable rate climate. If rates rise, so will the borrowing costs for your HELOC.
Home equity loans, however, will remain predictable and cost-effective. So, choose the latter over the former right now.
Borrowing more than needed
In today's high interest rate environment, you should be extra careful and only borrow exactly what you need. But with home equity borrowing, in which your home is used as collateral — and which you can lose in the process if you don't repay what you borrow — it's critical to borrow only exactly what you need. Considering that the average homeowner has around $193,000 worth of accessible equity now, it can be tempting to borrow a little extra. But avoid that temptation and stick to as strict a budget as possible.
Using it for the wrong purposes
You can essentially use your home equity to pay for anything. But that doesn't necessarily mean you should, especially in today's uneven economy. So, for example, consider other means for paying big expenses like weddings, college education and cars.
But if you're considering home projects, repairs and renovations, this may be the best way to pay for it. That's because the interest you pay on home equity loans and HELOCs may be tax-deductible if used for these purposes. That's a major plus compared to credit cards and personal loans, both of which you'll have to pay hefty interest no matter the intended use.
The bottom line
In today's unique rate climate, borrowing options need to be approached cautiously. Home equity loans and HELOCs are both great, low-cost alternatives to pursue, but to fully optimize them, homeowners will need to avoid some easy mistakes. So don't wait for rates to drop to an ideal level (because they may never get there) and choose the security of a home equity loan over the variable rate nature of HELOCs now. Homeowners should also avoid the temptation to borrow more than they need and they should be smart about what they use it for. By avoiding these errors this May, homeowners will better be able to take advantage of the home equity they have taken years to build.
