What's the best home equity borrowing option right now?
Inflation is almost at the Federal Reserve's target 2% goal. Unemployment figures are low. And interest rates were just cut for the first time in more than four years. It's clear that the economic climate is changing again and both savers and borrowers need to be prepared for it. While cost-effective borrowing options are still scarce – it will take time for these developments to reverberate through the wider rate climate – there are still some that make sense now. Home equity borrowing is one of them.
Right now, homeowners have approximately $330,000 worth of home equity, on average. And they can access it via a variety of inexpensive ways. But the interest rate a home equity borrowing product comes with isn't (and shouldn't be) the only factor worth considering now. Instead, borrowers should take a more complete look at their options before acting. But what is the best home equity borrowing option right now? That's what we'll help answer below.
See how low of a home equity loan rate you could secure here.
What's the best home equity borrowing option right now?
While the "best" home equity borrowing option will be relative to the individual homeowner, there's a compelling case to be made for each of the following:
Home equity loans
Home equity loans come with some of the lowest interest rates around right now – just 8.36%, compared to nearly 13% for personal loans and a dramatic 23% for credit cards. And, if used for eligible home repairs and renovations, you'll be able to deduct this minimal interest when you file your taxes next spring.
Who is it best for right now? Home equity loans are best right now for those homeowners who are looking to access their equity at the lowest cost possible but don't have the ability to weather the risk that variable rate home equity lines of credit (HELOCs) come with. Since home equity loan interest rates are fixed, borrowers will know exactly what their monthly costs will be for the full repayment period. And, if rates fall significantly during that time, they can refinance to the lower rate.
Get started with a home equity loan online today.
HELOCs
HELOCs work the same way credit cards do in the sense that they provide the borrower a revolving line of credit to utilize. While HELOC interest rates are slightly higher than home equity loans (averaging 8.73% currently), it may not matter much longer. HELOC rates are variable and subject to change monthly, which is a major advantage in today's cooling rate climate (no refinancing required). They also come with the same tax benefits that home equity loans do.
Who is it best for right now? Right now, a HELOC is best for a borrower looking to capitalize on future rate cuts without having to wait for those cuts to be formally issued, since the rate will adjust independently without action on behalf of the homeowner. HELOCs are also generally better for those homeowners who can afford the inherent risk of a variable rate as they can rise as easily as they can fall.
Reverse mortgages
Reverse mortgages allow homeowners to rearrange the normal borrowing flow. Instead of repaying a lender the money borrowed from the accumulated home equity, those who take out a reverse mortgage will receive monthly payments to use as they see fit. This will still reduce the home equity, but it will only need to be repaid if the owner sells the property in question or dies.
Who is it best for right now? This is an easy one: seniors. Homeowners age 62 and older are the only ones who can qualify for this borrowing option (with rare exceptions). Still, it's critical to remember that every dollar borrowed will be deducted from your equity (with interest), so be careful with how much you ultimately decide to withdraw.
Learn more about your reverse mortgage options here.
What about cash-out refinancing?
In a different rate climate, cash-out refinancing could be beneficial for homeowners. This occurs when you take out a new mortgage loan in an amount larger than your current one. You then use the former to pay off the latter and take the difference between the two as cash for yourself. But that trade-off involves swapping mortgage interest rates. While that would've been hardly noticeable in 2020 and 2021, for example, it could be a significant trade-off now, particularly with average mortgage rates still in the low 6% range. So, consider this option, just maybe not right now.
The bottom line
Home equity loans, HELOCs and reverse mortgages could all be the "best" home equity borrowing option now depending on your financial needs and circumstances, so consider all three. But be cautious with how much you ultimately decide to withdraw, as your home should not be viewed as an endless source of funding. If you can't pay back what you borrowed, you could risk losing it altogether.
