Home equity loan risks to know this March
If you need extra financing now and already own a home, you may be in luck. With a home equity loan, you can potentially borrow up to 80% of your existing home equity. And with the average home equity level sitting around $313,000 now, that means six figures worth of extra help in an economic climate still plagued by inflation and interest rate concerns. Plus, with a home equity loan, qualified borrowers will secure an interest rate materially lower than what's generally available with a personal loan or credit card.
Still, a home equity loan uses your home as collateral, so you'll need to manage that risk to avoid losing your home to the lender. But it's not the only risk of home equity loan borrowing to be aware of this March. Below, we'll break down three critical other ones to be aware of before applying for a loan.
Start by seeing how much home equity you could borrow here now.
Home equity loan risks to know this March
The risks of a home equity loan can change as the economic climate changes. Here, then, are three specific ones to be aware of this March:
A fixed, higher rate
Right now, home equity loan interest rates are more than a quarter percent higher than those on home equity lines of credit (HELOCs). While the difference between an 8.37% rate and an 8.03% rate may not seem significant on paper, it can lead to substantial savings over the typical 10- or 15-year repayment period. And it's important to remember that home equity loan rates are fixed, so you'll be stuck with that higher rate until taking refinancing action while HELOC rates will adjust downward if market conditions continue moving that way.
Compare home equity loans and HELOCs online to learn more.
Refinancing closing costs
While a fixed interest rate may be beneficial now, even if it's higher than the average HELOC rate, it's important to remember that refinancing to a potentially lower home equity loan rate later this year or at some point in the future won't be quick. And it won't be free. Home equity loan refinancing closing costs can range between 1% to 5% of the total loan amount, easily wiping out some of the savings secured by refinancing to the lower rate. Take a wider look at the interest rate climate then, before proceeding. If you're confident that rates will fall immediately after locking today's home equity loan rate offers, you may be better served by opening the variable-rate HELOC instead.
Immediate repayments
If you're in a financial position in which you need the funds a home equity loan can provide, and have already exhausted alternative options, immediate repayments may not be achievable. But that's generally what will be expected with a home equity loan since the funds will be disbursed to you in one large, lump sum. You'll be expected to make repayments right away.
A HELOC, however, in addition to the lower, variable interest rate won't require repayments until after the draw period ends, and that could be anywhere between five and 10 years, on average. So if you're unsure of your ability to make immediate repayments, a HELOC may be the better way to borrow equity this March and in the months ahead.
The bottom line
A home equity loan still has natural advantages for borrowers but in the evolving economic landscape of early 2025, it may be a bit riskier than some would prefer, particularly if looking for the most inexpensive way to borrow money now. By weighing these risks and understanding the pros and cons of alternatives like HELOCs, homeowners can make a better-informed decision about which of these products is better for them now as well as which is likely to be more helpful in the future.
