After an almost 10-year holding pattern at nearly historic lows, the Federal Reserve approved small interest rate increases during each of the past two Decembers, and rates are expected to continue climbing. If you currently have or are interested in applying for home equity financing, here’s how this will affect you.
Home Equity Financing 101
Home equity financing falls into two major categories:
- Home Equity Loans: These are lump sum installment loans, typically with fixed interest rates, which makes it easy to budget for payments. Terms often range from five to 20 years. This option is well suited for large, one-time expenses.
- Home Equity Line of Credit: A HELOC allows you to borrow as much as you need at the time you need it, within the limit of your credit line. Interest rates tend to be variable, which means payments fluctuate with changing rates. HELOCs are a good way to pay for improvements to your home that will increase its value.
Both options involve borrowing against your home’s equity, with the home serving as collateral. In most cases, home equity loans and HELOCs also offer a tax break in the form of interest-payment deductions.
Home Equity Loans
If you’ve already got a home equity loan with fixed rates, your payment will stay the same no matter how much national rates rise. If you’re thinking about taking out a home equity loan soon, you’re also in a good place. Even with the slight increase in rates, home equity loans are still very affordable, and locking in fixed rates now protects you against future rate hikes.
HELOCs (Home Equity Line of Credit)
Since rates are on the rise, you can expect variable rate HELOC payments to increase accordingly. But APRs should climb gradually, so you won’t see dramatic changes right away. To avoid getting in over your head, try to pay balances sooner rather than later, while rates are still relatively low. You might also want to consider converting to a fixed rate home equity loan.
Financial institutions like Amplify Credit Union offer competitive home equity financing options with flexible terms and no prepayment penalties, as well as unsecured, fixed-rate homeowner express loans. Be sure to choose the right home equity financing for your needs to maximize your financial health despite rising interest rates.
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