Why Home Equity Loans Beat HELOCs in 2022
Why Home Equity Loans Beat HELOCs in 2022
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You might want to go for a home equity loan for a big reason.


Key points

  • A home equity loan and a HELOC allow you to borrow against your home.
  • Home equity loans might be a better bet this year due to changing interest rates.

One of the benefits of owning is being able to tap into the equity in your property. You can borrow against this equity for a variety of purposes, whether it’s to fix problems with your home, do renovations, or use the money for something unrelated to your property, like starting a small business or moving away. on holiday.

Right now, homeowners across the United States are sitting on a large amount of equity due to higher home values. And you may be keen to exploit yours.

If you don’t want to take out a new mortgage (specifically, a cash refinance) to access that equity, you can borrow against your home through a home equity loan or line of credit (HELOC). Both options have their pros and cons, but you might want to go for a home equity loan this year for a big reason.

It’s all about interest rates

One of the advantages of taking out a home equity loan over a HELOC is locking in a fixed interest rate on the amount you borrow. This ensures that your payments will not increase during the repayment of your loan.

With a HELOC, you get more flexibility in how much you borrow since you don’t immediately take out a lump sum loan. Instead, you get a line of credit that you can draw on over what is usually five to 10 years. But HELOC interest rates can be variable, which means that once you tap into your HELOC, your interest rate can increase during your repayment period.

In the meantime, there is a good chance that interest rates will increase this year on consumer products in all areas. The Federal Reserve plans to raise its federal funds rate.

Now, to be clear, the Fed won’t dictate the interest rate you pay on your home loan or HELOC, because they don’t actually set consumer interest rates. Instead, it targets the rates banks charge each other for short-term borrowing. But Fed actions tend to influence consumer rates, and so this year it’s fair to assume that rates will start to climb. And they can continue to climb for years afterwards.

That’s why if you’re going to be borrowing against your home, it might pay to secure a home equity loan – quickly. With rates starting to rise, you may want the security of having a fixed interest rate on the amount you borrow – and predictable payments to follow.

How to find a home equity loan

As with any loan you take out, it pays to shop around with different home equity lenders to see which offer the most competitive interest rates. Also be aware that you will be charged a fee to close this loan, so you will need to pay attention to this as well.

Meanwhile, with home equity levels so high, you might be tempted to err on the side of borrowing more rather than less. But remember that falling behind on a home loan can have serious consequences, such as potentially, in extreme situations, the loss of your home. Before signing a loan, make sure you are only borrowing the amount you need and not borrowing more.

A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage

Chances are, interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.

Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.

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