How to maximize your home equity loan as rates rise
Despite rising interest rates, homeowners today are continuing to tap into their home's equity for extra cash in the form of home equity loans or home equity lines of credit (HELOCs).
There are a few reasons why borrowing from your home equity could be a good option now — not only are home values high (though they're starting to decline in some parts of the country) but home equity borrowing options typically carry lower interest rates than other loan or credit types since the money is secured by your home.
If you think home equity could be a good option for financing your next renovation or as a way to consolidate existing debt, it can help to make sure you're taking advantage as best you can while rates are high. Below, we'll walk through three ways to do so.
Start by comparing home equity rates you can qualify for now.
How to maximize your home equity loan as rates rise
Here are three ways you can make the most of your home equity even as interest rates go up:
Get the best rate
One clear way you can counter the effect of increasing APRs is by making sure you qualify for the lowest rates possible.
Today, you may be able to get home equity rates as low as 8% APR, depending on a number of factors. While there are some you can't change, like what market your home is located in, there are some parts of your loan application more in your control.
Perhaps most important is your credit score. Before you apply for a home equity loan or HELOC, become familiar with your credit score and the details on your credit report. Make sure there are no errors that could be negatively affecting your score, and take care not to open any credit cards shortly before you apply for your home equity loan (since doing so could have a temporary impact on your score).
Another way to guarantee you get the lowest rate possible is by shopping around. Consider checking with a few different lenders to see what rates and loan amounts you prequalify for — then use that to compare different options and find the right one for you.
Get started by exploring today's top home equity rates here.
Budget for your monthly payments
If you fall behind on your home equity loan payments, you could risk losing your home — since the loan is secured by the value of your home. Not to mention the extra debt you could take on from penalties.
An important way to maximize the value of your loan in any rate environment, but especially one when rates are high, is to make sure you know you can cover your monthly payments before you apply.
"Just like any other loan, don't sign the paperwork before you have a solid game plan for how it will be paid back," says Charles H Thomas III, CFP, founder and president of Intrepid Eagle Finance. "For example, if your loan means a new monthly payment, make sure that is something your ongoing budget will support."
The current rate environment could also play a part in whether you're better off choosing a variable or fixed interest rate loan.
If you believe interest rates will remain high, you may be better off choosing a fixed-interest rate home equity loan — so you can lock in today's rates before they go up again. However, if you think rates could drop within the lifetime of your loan, you might want to take a chance on a variable-rate HELOC. This could result in lower payments over time. But you should also take any potential monthly payment fluctuations into account in your budget if this is the option you choose.
Pay your loan off early
Once you know you can meet your monthly payments, try paying even more toward your loan so you can reduce the overall amount of interest you pay regardless of your actual APR.
"Since interest rates are so high, it is very expensive to utilize a home equity loan or HELOC," says Brandon Amaral, CFP, founder of Amaral Financial Planning. "These types of loans are best used in the short term if they can be paid off within a few years."
If you pay your loan off early, you'll prevent your principal balance from accruing as much interest as it otherwise would. Just check the terms of your loan agreement before doing so. While it's not common, some lenders may enforce a penalty for early repayment.
The bottom line
Despite high interest rates, a home equity loan or line of credit could be a good way for homeowners to tap into some extra funds for home projects, debt consolidation or other financial goals. Plus, even if the rates are higher than they were a few months ago, borrowing from your home equity can still be less costly than higher-rate options like personal loans and credit cards.
Make the most of your home equity loan or HELOC by shopping around to guarantee your best rate, budgeting for your monthly payments and making a plan to exceed the amount you owe each month and pay down the balance early.
Considering a home equity loan or HELOC today? Start by comparing the best rates in your area.
