With mortgage rates higher than ever, it may not currently be an ideal time to move or refinance your current mortgage rate however there may be a solution for homeowners. Despite the Federal Reserve lowering the benchmark interest rate by 0.25%, interest rates remain high. Currently, the average 30-year new purchase mortgage rates are sitting at 6.90%. While this is lower than October 2023’s 23-year record breaking peak of 8.01%, this rate still sits higher than the historic low of 2.79% of July 2021.
A possible solution to high mortgage rates
With the current interest rates sitting at all time highs, many prospective and current homeowners find themselves between a rock and a hard place. Prospective homeowners are unable to afford to stop renting and get approved for a loan to buy, while current homeowners who are looking to move are reluctant to find a new home and increase their mortgage rates.
If you are in a position where you do not want to move because of your current home’s low interest rate but are still looking to find a new property to call home, a home equity loan may just be the solution you have been looking for. A home equity loan is a type of loan that allows homeowners to borrow money by using the equity in their home as collateral. The equity in a home is the difference between its current market value and the outstanding balance of the mortgage.
Benefits of a home equity loan over a traditional mortgage
Unlike a traditional mortgage, which is used primarily for purchasing a home, a home equity loan provides homeowners with a lump sum based on the value of their property excluding the remaining mortgage balance. Typically offering lower interest rates than unsecured loans, home equity loans have the benefit of fixed interest rates and predictable monthly payments.
In addition, they also allow homeowners to access larger sums of money without the need to refinance their original mortgage. This makes them an attractive option for purposes such as home renovations, debt consolidation, or other major expenses. However, since the loan is secured by the home, there is a risk of foreclosure if payments are not made, so careful financial planning is essential before taking one out.
How a home equity loan can help you
If you have been wanting to move homes to upgrade your living situation but do not want to let go of your current interest rates, a home equity loan could give you the opportunity to remodel your home instead of moving to a whole new property. Another benefit of renovating your home using a home equity loan is that if you use the funds from a home equity loan for a remodel or renovation, the interest you pay can be tax-deductible.
Generally speaking, home equity loans benefit homeowners who possess high amounts of equity and want to complete a large-scale project. Home equity loans can provide you with more money to borrow than a personal loan from a bank, hence why they are more useful for projects which require significant capital. However, to have high equity, you generally need to have owned your home for a while. This makes this solution only worthwhile for established homeowners.
In a time of high mortgage rates, a home equity loan can serve as a viable solution for homeowners seeking to access funds without refinancing their existing mortgage or taking out a second mortgage to pay for a renovation. By borrowing against the equity in their home, individuals can secure a loan at a lower interest rate compared to many unsecured options, and avoid the potentially higher rates that come with refinancing.
