Why home equity may be the best borrowing option right now
While the Federal Reserve has made numerous moves over the last few years to try and temper inflation, things aren't fully back on track just yet. The latest inflation report, released today, shows that the March inflation rate ticked back up for the second month in a row, hitting 3.5% — up slightly compared to the rate of 3.2% from the month prior.
That's bad news for borrowers, who have already been facing elevated interest rates on most borrowing products, from credit cards to personal loans. And while there were expectations that the Fed would lower its benchmark rate a few times this year, leading to lower interest rates for consumers, it's unclear what may happen now that stubborn inflation is continuing to cause issues with the economy.
Given today's higher costs of borrowing, it makes sense to look for ways to access the affordable financing you need. And, one option that has become increasingly appealing is tapping into the equity built up in your home. In fact, your home equity may be the best borrowing option right now for several key reasons.
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Why home equity may be the best borrowing option right now
There are a few big reasons why borrowing from your home equity could be your best option today, including:
Home equity loan rates are lower than many other options
When the Federal Reserve raises interest rates, it impacts the cost of most types of consumer borrowing, from credit cards to personal loans. However, home equity loans and home equity lines of credit (HELOCs) tend to be less affected by these rate hikes.
That's because home equity financing is secured by the value of your home, whereas other types of loans are unsecured. Lenders are willing to offer lower rates on secured loans since they have the home as collateral. For example, the average home equity loan interest rate is currently 8.59% (as of April 10, 2024) and the average HELOC rate is 9.04%. Those rates are significantly lower than the over 21% average rate for credit cards and the average personal loan rate, which is hovering above 12% currently.
So while the cost of other borrowing has increased significantly in the past year, home equity borrowing remains a relatively affordable option. This makes it an attractive choice for funding large purchases, consolidating debt or covering unexpected expenses.
Learn more about the home equity rates you could qualify for today.
The average homeowner has a lot of home equity to borrow from
Another key factor making home equity loans appealing right now is the significant amount of equity that the average U.S. homeowner has accumulated. According to the most recent data, the average homeowner has about $299,000 in home equity — about $193,000 of which is tappable, meaning that it can be borrowed against.
This uptick in home equity is due, in large part, to the major run-up in home prices that occurred over the past several years. Nationwide, home prices have increased by about 57% since the start of 2020. So even as mortgage rates have risen, many homeowners still have a substantial amount of equity they can tap into.
And, the more your home has appreciated, the more equity you likely have. This equity can serve as a valuable source of affordable financing when other options are more expensive.
It could take a while for borrowing rates to drop
At the start of 2024, many economists were expecting the Fed to lower rates toward the middle of the year. But with the recent upticks in the inflation rate, it's unclear if or when the Fed may decide to lower its benchmark rate to ease the burden on borrowers.
After all, the Fed has for several months kept its benchmark rate paused at a 23-year high of between 5.25% and 5.50%, and it did so again when it met in March. The goal is to bring inflation back down to the 2% target, and the Fed has indicated it will continue to keep rates high until it sees clear evidence that inflation is easing.
In turn, rate cuts may be off the table for now. And, one Fed official, Federal Reserve Bank of Minneapolis President Neel Kashkari, has already warned that rate cuts may not happen at all in 2024.
"If we continue to see inflation moving sideways, it would make me question whether we needed to do those rate cuts at all," Kashkari said in an interview last week.
This means borrowing costs for things like credit cards, auto loans and personal loans could remain elevated for the foreseeable future. That means home equity financing could continue to be one of the most affordable borrowing options available to you.
The bottom line
With persistently high inflation, elevated interest rates and substantial home equity built up by many homeowners, now may be an opportune time to explore a home equity loan or HELOC. This type of borrowing can provide a flexible and relatively affordable borrowing option compared to other financing choices available today, and given the uncertain interest rate environment, it could be the best option to consider now and in the future.
