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In the current economic environment characterized by stubbornly high inflation and high interest rates, accessing large amounts of cash through traditional borrowing channels has become an expensive proposition. With the Federal Reserve benchmark rate elevated and on pause at the maximum of 23 years in an attempt to cool inflation, the benchmark rate has pushed up funding costs across the board. For example, the average interest rate on a personal loan is now over 12%, while annual percentage rates (APRs) on credit cards routinely exceed 20%.
However, for cash-strapped homeowners, take advantage the equity they have built in their homes It can be one of the most affordable ways to borrow a substantial amount of money right now. When removing a home equity loan or a home equity line of credit (HELOC)you're leveraging your home's current market value as collateral to unlock funds at a typically affordable price.
That said, like other types of debt, the home equity loan and HELOC rates they are still high compared to just a few years ago. However, these fees still do home equity debt it looks downright attractive compared to the double-digit APRs attached to most other consumer finance options. And, there are some other good reasons why it might make sense take advantage of your home's heritage to access cash right now.
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6 Reasons to Leverage Your Home Equity for Cash Right Now
Here are some compelling reasons why now may be a good time for homeowners who need access to cash to consider tapping their home equity:
Access to some of the lowest borrowing rates
With personal loan rates above 12% and credit card interest rising 21%, homeowners borrowing against their equity can access funds at a relative bargain. That's because, right now, the average interest rate on a fixed-rate home equity loan is just 8.59%, while the average HELOC rate is 9.06%, that is, both options have average rates that are much lower than the other options.
And, even a small difference in a loan's interest rate could make a big difference over time, especially when you're borrowing large sums of money. In turn, these low rates linked to home equity make it one of the most prudent ways of financing available today.
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Ability to borrow large sums of cash
One of the main advantages of taking advantage of your home equity compared to other financing options is the large amount of money can potentially access. Right now, the average homeowner has it nearly $300,000 in equity built at home. Of that $300,000 in equity, about $190,000 is home equity for the average homeowner, meaning it can be borrowed with a home equity loan.
To put that in perspective, most personal loans from banks and credit unions top out $50,000 for qualified borrowers, and the largest amount you can typically borrow with a very strong borrower profile is about $100,000. And the major credit card issuers rarely extend revolving credit limits above about $30,000 without cardholders having stellar credit profiles and high incomes.
Conversely, the average homeowner's ability to potentially unlock up to $190,000 or more in affordable cash simply by borrowing against their home's equity is difficult to match through other financing avenues.
Potential tax deductibility
In addition to low interest rates and higher loan limits, the IRS offers an additional incentive for homeowners using home equity to finance renovations, additions or other substantial improvements to their property. If the borrowed funds are used for eligible projects that increase the value of your home, the interest paid on that debt it can be deducted from your taxable income. This makes home improvement equity withdrawals even more affordable compared to the alternatives.
Various types of loans to choose from
Home equity borrowers can opt for a traditional equity loan, which is a global loan with a fixed interest rate and predictable monthly payment, or a HELOC, which it works like a revolving line of credit, which allows you to draw funds as needed during the draw period at variable interest rates. In addition, both home equity loans and HELOCs are included a variety of loan termstoo.
Having multiple loan options to choose from and different loan terms to choose from allows you to customize your home loan to best suit your needs. For example, if you need a longer period to pay off what you owe, you can opt for a home loan with a term of 20 to 30 years, which will give you plenty of time to pay back what you have borrowed. Or, if you want to save on interest and pay off your loan quickly, you can opt for a loan term of up to five years.
Funds can be used for almost any purpose
From financing a new bedroom addition or in-law suite to paying off high-interest credit card balances through debt consolidation or even covering the cost of a child's college tuition or financing the renovation of the kitchen of your dreams, loans are obtained from the withdrawal of capital your home it can be used for almost any purpose, personal or not. This almost unmatched flexibility makes home equity borrowing an attractive option if you need access to a large amount of money now at an affordable price.
The guarantee could facilitate approval
Unlike unsecured debt such as personal loans or credit cards that are issued solely based on your credit profile, home equity loan products require you to use your home as collateral. This provides lenders with additional security and can make it easier to qualify since you have substantial skin in the game through your home's participation.
That said, you should understand that failure to pay could put your property at risk of foreclosure. So while using your home as collateral could mean an easier approval process, it also has its potential pitfalls to consider up front.
The bottom line
While tapping your home equity for cash may be one of the smartest borrowing moves to make in this high-interest period, it's still crucial to take the decision seriously. Carefully calculate whether you can really afford the new recurring payment on top of your existing mortgage and family budget. And, understand that you're putting your home up as collateral, so any inability to keep up with your payments could put your living situation in jeopardy. But when done wisely, a home equity loan or HELOC could provide significant financial flexibility at a relatively affordable cost in today's environment.
