Why you should use home equity with interest rates on pause

Interest rates have increased exponentially over the last 18 months, and that trend is due, in large part, to the Federal Reserve raising interest rates nearly a dozen times to try and get inflation under control. And, while inflation has indeed cooled compared to what it was this time last year, the recent rate hikes have also resulted in much higher borrowing costs. This has led many potential borrowers to wait on the sidelines in hopes that rates will decline in the near future.

But so far, no rate drops have occurred, and the cost of borrowing remains a lot higher than it was just a couple of years ago. It's not all bad news on the interest rate front, though. The Fed met again earlier this week and, rather than hike rates again, it opted to temporarily pause rate hikes — despite inflation hovering above the target rate of 2%. 

The Fed's decision to pause rate hikes is welcome news for most borrowers — whether they want to purchase a home with a mortgage, borrow money with a personal loan or tap into their home's equity with a home equity loan. And, if you're a current homeowner with equity in your home, there are a few good reasons why using home equity when interest rates are on pause can be a wise financial move.

Explore your top home equity loan options here to see how it could benefit you.

Why you should use home equity with interest rates on pause

There are a few different reasons it makes sense to use your home equity while interest rates are paused, including:

To lock in a favorable rate

One of the primary benefits of borrowing against your home equity when interest rates are on pause is the potential for lower borrowing costs. Since interest rates are temporarily stable, taking out a home equity loan or line of credit can be significantly cheaper than it would be in a rising interest rate environment. And, lower interest costs mean that you can access the money you need at a lower cost, ultimately saving you money in the long run.

So, homeowners may want to consider locking in a favorable interest rate now. By doing so, you can secure a low-cost financing option for your immediate needs, whether it's for home improvements, debt consolidation or other financial goals. 

Find out more about the home equity rates you could qualify for here.

To avoid the impact of future rate hikes

While Fed rate hikes are temporarily paused, it's essential to acknowledge that this pause may not last indefinitely. In fact, many experts believe that there will be at least one more rate hike in the near future. After all, while inflation has cooled compared to last year, it's still higher than it should be — and there's a strong possibility that the Fed will need to increase its benchmark rate at least once more to get it under control. 

Another rate hike by the central bank could lead to higher borrowing costs for various forms of credit, including home equity loans. By using your home equity to access funds at the current interest rates, you can protect yourself from the potential impact of rising borrowing costs in the future. This can translate into significant savings over the life of your loan or line of credit.

For access to affordable funds

The funds accessed through a home equity loan can be used for various purposes, such as home improvements, debt consolidation, education expenses or even investing in other opportunities. The affordability of these funds makes it a financially savvy move to leverage your home equity for such purposes — and when compared to other types of lending products, like credit cards, the average rates are much lower. 

For example, the average credit card rate hovers well above 20% right now, but the average home equity loan rate is 8.94% as of November 3, 2023. You could see big savings by lowering your interest rate by even a fraction of a point — and a double-digit difference in borrowing rates, like the difference between credit cards and home equity loans, can equate to a significantly more affordable loan. 

For long-term planning

Incorporating your long-term financial goals into the equation is also crucial. By taking advantage of favorable rates now, you can position yourself more strategically for the future. This might involve using home equity to invest in assets that have the potential to generate returns, ultimately building wealth over time.

For example, with interest rates on pause, some individuals may consider using their home equity to invest in opportunities that have the potential to yield a higher return than the cost of borrowing. Whether it's investing in stocks, starting a business or purchasing income-generating assets, using home equity can be a strategic way to diversify your investment portfolio and make your money work harder for you.

The bottom line

At a time when economic and financial uncertainties are common, the pause in interest rates presents homeowners with a unique opportunity to leverage their home equity for various financial goals. Lower borrowing costs, access to affordable funds, flexibility and potential tax benefits make using home equity a wise financial move. However, it's essential to exercise caution and ensure that you have a well-thought-out plan in place when tapping into your home equity to maximize its potential benefits while managing the associated risks.