Is a home equity loan safe right now?
When borrowing money, there are multiple factors to account for. The interest rate attached to a borrowing product is often key, as are the repayment terms. Borrower qualifications also play a role — as does the specific lender you intend to use. Before getting started, however, a more fundamental question needs to be answered. Specifically, is the product you're considering safe for your financial circumstances? The answer to this question is a highly personal one that's critical to get right, particularly so for home equity borrowers.
With options ranging from home equity loans to home equity lines of credit (HELOCs) to cash-out refinances and reverse mortgages, there are plenty of ways to tap into your accumulated equity. And, right now, the average homeowner has nearly $330,000 worth of equity — so there's plenty to use, too. Before getting started, however, borrowers should first be able to answer the basic question: Is a home equity loan safe right now? That's what we'll break down below.
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Is a home equity loan safe right now?
The answer to this question largely depends on the borrower in question. If you have the financial means to pay back all that you've borrowed, whether it be over a 10- or 15-year repayment period or something different, then a home equity loan is as safe now as it's always been. And with interest rates on these products lower than alternatives like credit cards and personal loans, they're likely one of the cheapest ways to borrow money right now, too.
That said, if you don't have the economic means to pay back your home equity loan, this can be a particularly dangerous way to borrow money. That's because your home functions as collateral in this borrowing exchange (thus the much lower interest rate when compared to the alternatives). If you're unable to repay your loan, you could risk your homeownership in the process.
"Taking out a home equity loan or getting a home equity line of credit (HELOC) are common ways people use the equity in their home to borrow money," the Federal Trade Commission (FTC) notes on its website. "If you do this, you're using your home as collateral to borrow money. This means if you don't repay the outstanding balance, the lender can take your home as payment for your debt."
So, like all borrowing products, a home equity loan is safe if you can repay it and dangerous if you can't. But because your home stands in the middle of this exchange, it can become particularly dangerous if you fail to make your payments. This is not a concern when dealing with credit cards and personal loans, which don't require collateral in exchange for funding. But with interest rates on credit cards recently surpassing 23% and rates on personal loans closing in on 13%, the average home equity loan rate of 8.41% is significantly cheaper. And if you can afford the costs of the loan both now and into the future, it's arguably one of the smartest ways to borrow right now, particularly with the rate climate more volatile than many would like.
Start exploring your home equity loan options online today.
The bottom line
The interest rate climate of 2024 isn't what it was just a few years ago. And while home equity loan interest rates are lower than many other options, that's largely due to the home in question functioning as collateral — if you don't make your payments on time you could lose it. It's important, then, to be clear-eyed and strategic in your approach to home equity borrowing. On the other hand, if you're well-positioned to repay your loan, this could be a safe and (relatively) inexpensive way to borrow money in an otherwise high-interest rate environment.
Have more questions? Learn more about home equity loans here.
