Home equity loans vs. HELOCs: What to consider for April
With so many notable and simple ways to borrow money, American homeowners can easily overlook one of the obvious ones: their home equity. Whether using a home equity loan or home equity line of credit (HELOC), homeowners can gain access to the average $313,000 home equity amount they've accumulated. And they can do it with an interest rate on either borrowing product that's materially lower than the averages tied to personal loans or credit cards (and they won't have to exchange their current low mortgage rate for a higher one as they'd have to with a cash-out refinancing).
Still, both home equity loans and HELOCs have timely pros and cons that should be understood before a formal application is submitted, particularly considering that the home serves as collateral and could be repossessed by the lender if repayments aren't made on time. As March ends, however, a month in which economic uncertainty and rate changes for HELOCs, in particular, were both pronounced, interested homeowners should more closely consider the future home equity landscape. Below, we'll break down three things prospective home equity borrowers should be contemplating heading into April.
Start by seeing how much home equity you could borrow here.
Home equity loans vs. HELOCs: What to consider for April
Here are three significant items those considering borrowing from their home equity should think about going into the new month:
There's no Federal Reserve meeting
Hope that that the Federal Reserve would cut its federal funds rate in March and, thus, pave the way for home equity loan rates to decline further was eliminated last week when the bank kept the benchmark interest rate unchanged, its second such meeting to do so. And while the Fed doesn't dictate the movements of home equity loan and HELOC rates, it is a primary factor that drives rates.
Without a Fed meeting scheduled until May, then, interested borrowers may want to take this lull in activity to shop around to find low rates and attractive terms. With a bit more time to act than they'd have ahead of any predicted Fed action, homeowners can use this April as a time to be strategic in their home equity borrowing.
Shop for HELOCs and home equity loans now.
HELOC rates could continue to decline
HELOC interest rates have been steadily declining for the past year-plus, whether there were Fed meetings scheduled or not. That trajectory is unlikely to change in April, making the line of credit a smart borrowing option for homeowners looking to exploit future rate declines. Thanks to a variable interest rate that will change monthly for borrowers, this could remain one of the cheaper ways to borrow.
Just remember that rates can adjust upward as easily as they can decline so inherent volatility will need to be priced in when calculating future repayments. And if you want to pay off the line of credit immediately while rates are low, be sure to explore that option in advance as many HELOCs come with a draw and separate 10- or 15-year repayment period.
Market uncertainty could make home equity loans preferable
Predicting the future of HELOC interest rates, as mentioned, is risky. And that could be a risk worth avoiding in today's uncertain market, in which inflation is declining but still sticky, high rates remain paused and stock market performance is uneven.
Against this backdrop, homeowners may prefer the security of a home equity loan. While the loan does come with a higher rate than a HELOC now (8.37% versus 8.03%), the home equity loan rate is fixed while the HELOC one changes. So borrowers will need to weigh the short-term savings costs for the long-term security a fixed-rate home equity loan provides to better determine which makes more financial sense for them both this April and over the months and years ahead.
The bottom line
This April could be an opportune time for homeowners in need of additional financing to review their home equity borrowing options. With no Federal Reserve meeting schedule and, thus, no major rate changes likely to be issued, homeowners can take their time to compare a HELOC rate that's likely to decline further in April versus a fixed home equity loan rate that will be both cost-effective and secure. Still, delaying action much longer may not make sense either. It can take weeks or even months to get your home equity loan funds disbursed so if you know you want to pursue this type of product it can be beneficial to start shopping around now.
