Why you should use a HELOC to pay for big expenses now
Home equity can provide homeowners the financing they need and, right now, there's a lot of equity to utilize. With the average homeowner sitting on approximately $300,000 worth of equity today, many may want to use this unique form of financing to pay for big expenses now.
And there are a variety of ways in which they can do so.
From home equity loans to home equity lines of credit (HELOCs) to cash-out refinancing and reverse mortgages, there's no shortage of ways for owners to access their equity. But while each of those will come with its own set of pros and cons, there's a compelling case to be made for using a HELOC over the others now.
Functioning like a credit card, this home equity borrowing option can be used to pay for a variety of big expenses from weddings to college education to outstanding debt. And, if you've already decided that home equity is the best financing form for you, then it helps to know the timely benefits of using a HELOC now. Below, we'll break down three of them.
Start by seeing what HELOC interest rate you're eligible for here.
Why you should use a HELOC to pay for big expenses now
Not sure if a HELOC is the best way to finance major expenses now? Here are three compelling reasons why it may be:
Lower interest rates than alternatives
Credit card interest rates are in the low 20s right now while the average personal loan rate hovers around 12%. But HELOCs are still in the single digits, even in today's elevated rate climate. The average HELOC rate is just 9.18% right now, multiple points lower than popular alternatives. And while that's slightly higher than today's average 8.59% home equity loan interest rate, the negligible difference between the two could soon prove to be a moot point in today's evolving rate climate.
Learn more about your HELOC options online now.
The potential for those rates to fall further
Simply put: HELOC interest rates are variable. Home equity loan rates are not. While this is a major disadvantage in an economy in which rates are heading upward, it's a distinct advantage now that interest rate cuts appear imminent. While credit card interest rates are also variable and subject to change, they're more than double what HELOC rates are now, and the difference between the two will likely remain the same even as rates start to fall. But a HELOC, which is already cheap, could become cheaper as soon as September.
No need for refinancing
While a lower home equity loan interest rate could be tempting now, it may not be worth it, even with the slight savings. As mentioned above, rates on home equity loans are fixed and will require refinancing to secure a lower rate. HELOCs, however, will automatically adjust (typically once per month). Additionally, because a refinance won't be required to secure a lower HELOC rate, borrowers will save on refinancing closing costs that they otherwise would have had to pay with the home equity loan counterpart. And in the face of multiple interest rate cuts ahead, it's arguably better to use a HELOC instead of a home equity loan now.
The bottom line
If you have expenses worth thousands or tens of thousands of dollars, a HELOC could be the smart and effective way to pay for them now. HELOCs come with significantly lower interest rates than popular alternatives and, inherently, the ability for those rates to adjust further downward later this year and into 2025. And, unlike home equity loans, borrowers won't need to pay to refinance to the better rate as the HELOC will just change automatically.
When considering the use of home equity, however, no matter the form, it's critical to weigh the pros and cons of each borrowing type, as your home will serve as collateral in these circumstances and you could potentially lose it if you can't afford to repay all that you've borrowed.
