The moment you make your first down payment, equity starts to build in your home. As you pay down your mortgage balance and make home improvements, equity will continue to grow. This doesn’t only work to your benefit when you choose to sell your home, you can borrow against your home in the form of a home equity loan for some of life’s major money milestones.
Home equity loans are sometimes called second mortgages. They use your home as collateral and pay a one time payment. This loan’s terms will vary depending on many factors including your credit score and the market value of you home. Market conditions are also important.
The Federal Reserve increased its benchmark rate by 0.75 percent to a range of 3.75% – 4% earlier this month. When these rates go up, it’s not uncommon for loan rates to go up as well.
This week’s home equity loan rates
Home equity loan rates ticked up again this week in the aftermath of the Fed’s latest move to curb inflation. Here’s a look at this week’s average interest rates for home equity loans, compared to last week’s rates, as well as the best home equity loan rates in your area.
What is a home equity mortgage?
Home-equity loans allow you to borrow against your home’s market value and receive a lump sum payment in return. Home equity loans can be a valuable tool for homeowners who want to finance large projects or more costly expenses. They typically have lower interest rates than personal loans and student loans.
These are just a few of the reasons you might want to consider a home equity mortgage:
- Home improvement projects: Remodeling your kitchen or bathroom can add significant value to your home and increase your return on investment. These upgrades are not always affordable and might not be within your budget. These projects can be funded with a home equity loans. You have the option of paying them off over time.
- College costs The borrowing rate for home equity loans is typically lower than other options, which makes them attractive to students who need to cover college expenses. However, you could miss out on certain loan protections available to federal student loan borrowers. While this could save you money, there are still risks to your financial health.
- Consolidating debt: High interest debt can be challenging to pay off if you’re paying more in interest each month than toward your principal balance. A home equity loan can be used to reduce the number of loan payments and possibly score a lower interest rate. This could help you save a lot over the course of your repayment period.
- Emergency expenses It’s important to have an emergency fund to catch you when you fall, but building up a decent cushion takes time. A home equity loan can be an affordable option if you are faced with unexpected medical expenses. However, it’s important to come up with a plan for how you’ll repay that loan once it’s all said and done.
How can I calculate my home equity
To figure out how much equity you have in your home, you’ll need to calculate the difference between the fair market value of your home and how much you still owe. Say your current outstanding mortgage balance is $150,000 and your home’s current market value is $350,000; that means that you have about $200,000 of equity in your home.
Keep in mind your home’s market value will fluctuate over time as you pay down your mortgage balance, your home’s condition changes, or there are shifts in the housing market and property values in your own neighborhood. A close watch on your mortgage balance and the economic climate in your area can help you get a better understanding of your home’s equity.
The pros and cons of home equity loan
Home equity loans offer homeowners additional financing options for large purchases. However, there are risks associated with them. Your home is the collateral required for a home equity mortgage. If you don’t have a solid repayment strategy in place or your home’s equity sees a drastic decline, you could still end up paying thousands in interest or owing more than your property is worth.
Pro: Fixed interest rates are common for home equity loans. Regular payments can make it easier to repay your debts.
Pro: Home equity loans interest may be exempt from tax Who doesn’t love a freebie come tax-time? If you use your home equity loan to cover the cost of home improvements and you meet the IRS’ requirements, you could shave a little off the top of your tax bill.
Con: Using your house as collateral for a loan is risky. A default on a home equity loan can lead to your losing your home.
Con: If your home’s value declines, you could end up owing more. Negative equity is real. If you borrow a large amount and your home’s value plummets below that amount, you could find yourself owing more than your home is actually worth.
To help you determine whether a home equity mortgage is the best option for your long term financial plan, consider the risks and the rewards.
Frequently Asked Questions
What credit score is required to get a home equity loan?
Lenders typically require a minimum 680 FICO score to obtain a home equity loan.
Are home equity loan rates more expensive than mortgage rates?
Because these loans are not repaid until the primary mortgages are fully paid, home equity loan rates can be slightly higher than mortgage rates. Lenders who hold home equity loans are not paid until the first mortgage lender has been paid.
Is it possible to deduct home equity loans from your tax bill?
You may also be able to deduct the interest you pay on home equity loans for up to $750,000 for single filers ($375,000 for married filing separately). This deduction is only available if you use the funds for personal purposes. “buy, build, or substantially improve your home” List your returns and get them sorted. according to the IRS.