3 home equity loan risks to know this November
While interest rates on traditional borrowing products like credit cards and personal loans are high right now – as they've been for much of the last few years – rates on home equity loans and home equity lines of credit (HELOCs) are in the single digits. And those rates could fall further if the Federal Reserve issues additional interest rate cuts to follow up on its September reduction. Combined with the knowledge that the average homeowner has approximately $330,000 in home equity right now, it's understandable if borrowers are considering turning to home equity loans to help make ends meet.
But while there are timely benefits to using a home equity loan right now, there are also some significant risks that borrowers should be aware of heading into November. Below, we'll break down three important ones to know before right now.
See what home equity loan rate you could qualify for here.
3 home equity loan risks to know this November
Home equity loans can benefit a wide swath of homeowners, but there are some inherent risks to the product that they should navigate around this November. Specifically, they should know that:
Interest rates could drop
Interest rates on home equity loans could and likely will fall in November if the Fed proceeds with another anticipated rate cut. That's an advantage, on paper, but it means that the rate you secure earlier in the month may not be as low as what's readily available later in November or in December. And you won't be able to take advantage because home equity loan rates are fixed and will need to be refinanced to secure a lower rate. In this climate, then, a HELOC, which comes with variable interest rates subject to change monthly may be better. A HELOC will likely have lower rates — and, thus, lower payments — for multiple months to come as interest rates decline.
You may have an extra expense
As noted, home equity loan rates could drop, perhaps by a significant margin, after you've already opened a loan. You'll then need to refinance to secure that newer rate and that will come at a cost. Home equity loan refinancing typically costs 1% to 5% of the total loan value. And if you're taking out a significant amount of equity, that could prove to be a costly expense. To avoid this extra expense, then, it's again worth considering a HELOC. HELOC rates adjust independently with no action — or expense — required on behalf of the borrower.
You may be tempted to overborrow
As mentioned above, the average home equity amount is closing in on $330,000 right now. That's a lot of money to utilize, particularly at a relatively low interest rate. Knowing this, it may be tempting to overborrow right now. But that would be a mistake. Your home functions as collateral when borrowing home equity from a lender. And, if you withdraw too much and can't repay your debt, you could risk losing your home in the process. So calculate your exact needs and borrow only that much with a home equity loan. If you don't know precisely how much you need to borrow, consider a HELOC, which has more flexibility and works similarly to a revolving line of credit like a credit card.
The bottom line
Home equity loans offer unique benefits for borrowers, even now (they have slightly lower rates than HELOCs currently). But there are some timely risks to know this November, too, like the potential to get locked in at a higher rate as the overall rate climate cools, the extra expense of having to refinance and the temptation to overborrow via one lump sum. By understanding these risks and working around them via alternatives like HELOCs, home equity users can better position themselves for financial success, both in November and for the long term.
Have more questions? Learn more about home equity loans and HELOCs here.
