Home Equity Loan Mistakes to Avoid This Month

With inflation sticky and interest rate at their highest level in decades, few profitable borrowing options are currently available to Americans. Credit cards and personal loans are averaging double-digit rates, and mortgages are nearing their highest point. since 2000. Homeowners, however, have a relatively inexpensive way to borrow money: their home equity. By applying for a home equity loan Or Home Equity Line of Credit (HELOC)owners can potentially access hundreds of thousands of dollars.

But against a backdrop of changing interest rates and with inflation more stubborn than most expected at this point in 2024, this form of borrowing must be approached judiciously. Owners should therefore know what measures to take in May and what mistakes to avoid. Below, we’ll detail four home equity loan mistakes to avoid this month.

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Home Equity Loan Mistakes to Avoid This Month

Here are four simple mistakes homeowners should avoid making when it comes to home equity loans this May.

Waiting for rates to drop

Whether you choose a HELOC or home equity loan, you will be able to get a interest rate below 10% right now (assuming you have a good credit score and borrower profile). But the rates for both borrowing options change daily. And with the prospect of rising interest rates currently more realistic than many had anticipated, waiting for rates to fall further is risky.

Instead, consider locking in a home equity loan rate today. If rates rise in the future, you’ll already be safe with the lowest option. And if they drop significantly, you can always refinance at the moment. Don’t wait for rates to drop – because they might not.

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Choosing a HELOC over a Home Equity Loan

Although HELOCs and home equity loans both allow homeowners to access the cash value of their home, they operate in distinct ways. HELOCs, for example, function as a revolving line of credit while Home equity loans are simple loans disbursed in a single lump sum. HELOCs also come with variable interest rates, however, which is a drawback in today’s unpredictable rate climate. If rates rise, so will the costs of borrowing your HELOC.

Home equity loans, however, will remain predictable and profitable. So, choose the latter over the former right now.

Borrow more than necessary

In today’s high interest rate environment, you need to be very careful and only borrow exactly what you need. But with home equity loans, in which your home is used as collateral – and which you can lose in the process if you don’t pay back what you borrow – it’s essential to only borrow exactly what you need. Given that the average homeowner currently has about $193,000 in accessible equity, it may be tempting to borrow a little more. But avoid this temptation and stick to as strict a budget as possible.

Using it for bad purposes

You can basically use your home equity to pay for anything. But that doesn’t necessarily mean you should, especially in today’s uneven economy. So, for example, consider other ways to pay for big expenses like weddings, college, and cars.

But if you consider home projects, repairs and renovations, maybe that’s the best way to pay for it. This is because the interest you pay home equity loans And HELOC may be tax deductible if used for these purposes. This is a major advantage over credit cards and personal loans, for which you will have to pay high interest regardless of intended use.

The essential

In today’s single interest rate environment, borrowing options must be approached with caution. Home equity loans and HELOCs are both great, low-cost alternatives, but to fully maximize them, homeowners will need to avoid some easy mistakes. So don’t wait for rates to drop to an ideal level (because they may never do so) and choose the security of a home equity loan over the variable-rate nature of HELOCs now. Homeowners should also avoid the temptation to borrow more than they need and should be smart about how they use it. By avoiding these mistakes in May, homeowners will be able to better enjoy the equity in their homes that they have spent years building.