There's no sense of panic in the air, but with interest rates slowly trending upwards, consumers may want to consider evaluating home equity loans now. Rather than putting off large home improvement projects or retiring debt, borrowers do have the ability to lock in a fixed-rate loan now as insurance against an interest rate spike in the near future. Products like a home equity line of credit (HELOC) offer an attractive option with one distinction: HELOCs may have fixed rates (with higher APR) or come with variable interest rates that could fluctuate after an introductory period. Let's examine the factors that go into making an informed choice about a home equity loan.
Understanding Home Equity Rates and the Current Climate
In May 2015, Forbes Magazine reported that rates were climbing slowly, but that the Fed is expected to push rates higher by mid-summer 2015. According to Forbes' predictions, rates should go up 1.5 points this year with an equal rise for 2016. Rates began favorably in 2015, with a low of 5.70 in March. In April 2015, an HELOC $30k was at 5.73, but rose to 5.80 later in the month. One straightforward way to keep a tab on home equity loan interest rates is to compare lenders at LendingTree. In other words, shop around.
When comparing lenders and getting live rates, be sure you're comparing loans over the same term. Lenders will determine your loan cap based on home valuation and how much remains on the mortgage (and other debts). Pay close attention to the package of fees that come attached to each loan package. Consider the total you'll pay on application, home appraisal, loan origination, and attorney and document fees. With a HELOC, the lender typically charges an application and annual fee, along with fees on transactions on the account, and potential penalties for idle periods or cancellation. Again, timely research can save borrowers money.
Looking over the Pluses and Minuses of Home Equity Loans
There are many reasons to tap your home equity and more benefits than than just good home equity rates – although that should be enough! Start with breaks on federal income tax. Interest paid on the first $100,000 of a home equity loan is deductible. Unlike a line of credit, a home equity loan with a fixed interest rate makes it easier to plan on payments throughout the term of the loan.
HELOCs offer homeowners great opportunities, too. Flexible credit lines allow borrowers to respond to immediate financial needs. However, a HELOC depending on how it's used, can plunge ill-prepared borrowers into the kind of credit despair known to those who go bust on the credit-card carousel. A spike in variable HELOC rates can also create financial dilemmas for big spenders.
The greatest risk with a home equity loan is the possibility of going underwater in a grim economy or, worse, the borrower can lose the house by defaulting on the loan payments.
A Final Word About Home Equity Loans
A home is often the greatest asset and investment families make to provide security and comfort to their loved ones. Borrowing in a fit of panic is a poor economic strategy. Interest rates on home equity loans are often pegged to the overall interest rates regulated by the Fed. Those rates are easy to track. Make a wise choice.