Is a HELOC still a good idea amid growing inflation?
Inflation ticked up again in February with prices that were 0.4% higher than those in January. And, a similar trend occurred in January when inflation unexpectedly increased month-over-month. That's important data to consider if you're thinking about taking out a home equity line of credit (HELOC) (or borrowing money for another purpose).
Right now, the Federal Reserve's benchmark rate is paused at a 23-year high. And while there have been widespread expectations that the Fed would start cutting rates in mid-2024, if inflation continues to tick up in the future, it could threaten to delay those cuts.
And, since the federal funds rate forms the foundation for consumer interest rates, that could be bad news for borrowers. So does it still make sense to take out a HELOC amid growing inflation?
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Is a HELOC still a good idea amid growing inflation?
Despite the issues with stubborn inflation, it may still be a good idea to tap into your home equity with a HELOC right now. Here's why:
Rates are still lower than other popular options
Because HELOCs use your home equity as collateral, they tend to come with competitive interest rates, as there's less risk to the lender. That's especially true when compared to other borrowing options.
For example, the average credit card rate is currently 21.47% — and the average rate on personal loans is currently 12.10%. But today's average HELOC interest rate is just 8.98%, so in many cases, it's cheaper to borrow money with a HELOC than another type of lending product.
Take advantage of competitive HELOC interest rates now.
Rate cuts may still come this year
The Federal Reserve began increasing rates in response to COVID-era inflation — during which the annual inflation rate climbed above 9%. So while the inflation rate ticked up in February, growing 3.2% year-over-year, there has still been a significant improvement in the inflation rate compared to the highs experienced in mid-2022.
And, while economists have revised their forecasts to push back rate cut expectations, they still expect the Fed to start cutting rates later this year. That's good news for those who open a HELOC now, as the variable nature of HELOC rates means that borrowers could benefit from future rate cuts.
HELOCs offer unique tax benefits that others don't
Competitive interest rates aren't the only benefit HELOCs offer; they may also come with tax benefits. For example, if you use the proceeds from your HELOC for home repairs or renovations, you may be able to deduct the interest you pay on the loan.
However, to qualify for this tax deduction, you'll have to use the loan to repair or renovate the home you're borrowing against. If you use the proceeds from a home equity loan to repair or renovate a different property, your interest may not be tax deductible.
"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS states online. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
Don't miss out on the benefits of a HELOC. Compare your options now.
The bottom line
A HELOC may be a wise choice right now, even amid growing inflation. After all, HELOC interest rates are still competitive when compared to rates on other lending options — and rate cuts may still be on the table for later this year. Plus, these loans come with potential tax benefits that could allow you to write off some of the interest on your taxes. Compare your HELOC options now to find out how affordable these loans can be.
