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:
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- 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.
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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.