Keeping a Low Rate With These Home Equity Loans
Many current homeowners prioritize holding onto the ultra-low mortgage rates secured during the pandemic. With mortgage rates hovering around 3% at that time, homeowners are now hesitant to take out new loans at today’s rates, which average over 7% for a 30-year fixed mortgage. A 7% mortgage rate would result in significantly higher monthly costs and interest charges over the life of the loan, even if the borrowing amount remains similar.
However, mortgage rates aren’t the only factor that has surged in recent years. Home values have also soared, and the average homeowner with a mortgage now has nearly $300,000 in home equity, with about $206,000 of that being tappable. This equity provides homeowners with an affordable borrowing option for major expenses like home renovations, education costs, business investments, or debt consolidation.
It’s crucial to understand the implications if you want to keep your low mortgage rate while borrowing from your home equity. Some methods, like cash-out refinancing, require giving up that low mortgage rate. However, other options allow you to tap into your home’s equity without altering your existing loan.
Home Equity Borrowing Options to Keep Your Low Mortgage Rate
Homeowners have several ways to borrow against their home equity while retaining the low mortgage rate acquired during the pandemic:
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit secured by your home equity. You can borrow against this line as needed, up to the credit limit, with a typically variable interest rate. The flexibility of a HELOC is a major benefit, as you only pay interest on the amount you borrow rather than the entire credit line. While HELOC rates can fluctuate based on market conditions, they are currently lower than many other borrowing options, such as credit cards. The average HELOC rate is just over 9%, compared to over 21% for credit cards. This makes a HELOC a preferable option for most homeowners, as it allows them to keep their original mortgage rate.
Home Equity Loan
A home equity loan provides a lump-sum amount secured by your home equity, with a fixed interest rate repaid over a set term, usually ranging from five to 30 years. The fixed rates for home equity loans are advantageous as they remain consistent throughout the loan term. Since a home equity loan acts as a second mortgage, it doesn’t replace your current mortgage, allowing you to retain your low mortgage rate. Currently, home equity loan rates average 8.61%, making them more affordable than many other borrowing options.
Home Equity Sharing Agreement
For homeowners hesitant to take on new loans, a home equity sharing agreement is an alternative. This model, offered by specialized providers, involves selling a share of your home’s future appreciation in exchange for a lump-sum cash payment. While fees can be steep, this option helps avoid additional debt and doesn’t require changing your current mortgage rate. It can be worth considering under the right circumstances, but thorough research is necessary to understand the terms fully.
By exploring these home equity borrowing options, you can leverage the equity in your home while keeping your low mortgage rate secured during the pandemic. This can be particularly beneficial in today’s high-rate environment, where current mortgage rates are more than double those of pandemic-era rates. Before making any decisions, it’s essential to carefully consider the costs, risks, and long-term implications of each option to determine the best fit for your financial situation.