How much can you save by shopping for a home equity loan?
When the Federal Reserve met earlier this month, it once again held interest rates steady at a 23-year high due to persistent inflation and other economic factors. The decision marks the seventh consecutive meeting in which the Fed paused the federal funds rate at its current 5.25% to 5.50% range.
However, certain types of consumer borrowing rates, which tend to rise and fall in line with Fed decisions, have ticked lower for the past four weeks, perhaps in anticipation of potential rate cuts projected by many economists that are expected to occur later in the year. And that's good news for homeowners in need of cash — as they may be able to tap into their home's equity by borrowing money at a lower rate.
The average home equity loan interest rates stand at 8.60% currently (as of June 27, 2024). However, there are lenders offering much lower home equity borrowing rates for creditworthy borrowers. That's why it's a good idea to shop around and get quotes from multiple home equity loan and home equity line of credit (HELOC) lenders. By doing so, you may be able to find the best combination of low interest rates with minimal fees and closing costs.
Find out your top home equity borrowing options online now.
How much can you save by shopping for a home equity loan?
"A homeowner could potentially save thousands of dollars in interest over the life of a loan by shopping around for several different home equity loan options," says Faron Daugs, founder and CEO at Harrison Wallace Financial Group. Daugs recommends considering not only brick-and-mortar banks but also online banks and credit unions during your search.
By casting a wide net with numerous lenders, you're likely to see a broad range of rates and terms. And, keep in mind that even a small rate difference can lead to significant savings over time.
"Savings will depend on the life of the loan, interest rate and any origination fees. For example, a 1% difference over the 10-year life of a $100,000 loan could save you almost $6,000 in interest," Daugs says.
If interest rates continue their recent downward trend, it could also lead to lower loan costs. Home equity loans come with a fixed interest rate, so locking in a lower rate now might give you a more affordable loan than you would have received a month ago.
However, if you believe rates will continue to drop, you may want to wait before applying for a home equity loan.
Alternatively, you might consider a HELOC, which typically has a variable rate, allowing you to capitalize on any future rate drops. Of course, rates can also rise at any time, which could be likely if you have a longer-term line of credit — so make sure you know the risks of this type of borrowing before you make a decision.
Another benefit of getting multiple quotes is that you can use the competition to secure the best deal. When speaking with a potential lender, don't hesitate to mention any offers you've received for lower rates or reduced closing costs.
In fact, you should be ready to talk about your credit score, current market rates and offers you've received from other lenders, says Saddat Abid, CEO at Property Saviour.
"With that knowledge, borrowers can confidently walk up to lenders and bargain for lower interest rates, lower fees and more friendlier payment conditions," Abid says. "If you have a good credit score, coupled with a sound history of repayment, you can use them to your advantage and try to negotiate for a lower rate of interest."
Working with a mortgage broker is one way to save time while shopping for lenders.
"A mortgage broker can be an excellent resource in this instance as they are able to share many different lenders offerings and are not married to just one product at one bank," Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage, says.
Learn more about the home equity borrowing rates you could qualify for here.
Is this a good time to take out a home equity loan?
Whether you should take out a home equity loan now is a personal decision based on your unique situation. That said, a home equity loan could be beneficial if you need funds for emergency expenses or home improvements.
After all, even in today's high-rate environment, home equity loan options usually have rates that are lower than the rates on credit cards and personal loans. And, according to the IRS, you may be allowed to deduct your home equity loan interest if you use the loan funds to "buy, build, or substantially improve your home."
As with any financial product, though, it's essential to consider the downsides. The biggest drawback of home equity loans is that they use your home as collateral. If you miss payments or default on the loan, you could lose your home to foreclosure.
And, when shopping for a loan, make sure to look at more than just the interest rate. For example, be sure to compare the annual percentage rates (APRs). This figure reflects the "true cost" of borrowing and represents the loan's interest rate plus any additional points, fees and other charges that come with it.
If you decide you want to proceed with a home equity loan, start by getting your credit score and determining how much you want to borrow and for how long. It's also a good idea to research today's best rates on home equity loans.
