Why are most homeowners choosing to access equity in their homes opting for a Home Equity Line of Credit (HELOC) loan?  Primarily because most homeowners currently have an interest rate on their mortgages that is far lower than the current market rate.  A cash-out refinance would reset their mortgage interest rate to the current market rate and likely raise their monthly payments substantially.

A home equity loan is another option to consider when accessing home equity.  However, these are fixed-rate loans for set amounts, that will lock-in the currently high interest rates.  A HELOC is a variable-rate loan that can be drawn upon as-needed.  The variable rate will go down as rates drop, (but can also go up if rates increase).  Unlike a cash-out refi or home equity loan, borrowers only pay interest on the amount of the line that they are currently using.

There are several advantages of a Home Equity Line of Credit (HELOC) loan compared to a cash-out refinance or home equity loan when the borrower already has a low fixed-interest mortgage:

HELOC (Home Equity Line of Credit):

  • A HELOC is a revolving line of credit secured by the borrower’s home equity.
  • It allows the borrower to borrow against their home equity as needed, similar to a credit card.
  • During times of high interest rates, a HELOC can be advantageous for several reasons:
      • Flexibility: Borrowers can access funds as needed, paying interest only on the amount they use.
      • Lower Closing Costs: HELOCs typically have lower closing costs compared to refinancing.
      • Interest-Only Payments: Borrowers can choose to make interest-only payments during the draw period.
      • Variable Interest Rate: While this can be a disadvantage during rising rates, it can also work in the borrower’s favor if rates decrease.
      • Tax Deductibility: Interest on HELOCs may be tax-deductible if used for home improvements (consult a tax advisor).
      • No Changes to the Current Mortgage: A HELOC does not change the existing rate or monthly payment of the current low-interest rate mortgage.

This does not mean that everyone should get a HELOC instead of a cash-out refinance or home equity loan to access part of their home equity. Seniors also have the option of a reverse mortgage to access home equity without having to make monthly payments. Individual circumstances vary, so it’s essential to consult with a financial advisor or mortgage professional to determine the best option based on your specific situation.