To get the most out of a particular financial product or service, it’s critical to know when to act. For those considering their home equity as a funding source, that’s been most of the last two years. When interest rates soared on credit cards and personal loans they remained relatively low for home equity loans and home equity lines of credit (HELOCs). And after the Federal Reserve issued a 50 basis point rate cut in September they’ve become even cheaper for borrowers. In this climate, home equity loan lending, in particular, hit a 16-year high.
Going into November, however, there’s a strong argument to be made for favoring a HELOC over a home equity loan, even if the latter has a slightly lower interest rate right now. Below, we’ll explain why.
See how low of a HELOC interest rate you’d be eligible for here.
Why a HELOC is better than a home equity loan going into November
Not sure if a HELOC is the right move for you now? Here are three timely reasons why it could be preferred to a home equity loan:
Rates will fall
Interest rates were cut in September but additional cuts of 25 basis points each are being predicted for November and December, too. If you open a home equity loan, however, you won’t be able to exploit these cuts either time. That’s because home equity loans have fixed interest rates that will remain the same for the full repayment period (unless refinanced). HELOCs, however, have variable interest rates that can and will change monthly. While that was detrimental in the interest rate climate of recent years, it’s a unique advantage now as rates head downward.
Get started with a HELOC here now.
No need to refinance
You may be able to take advantage of a lower home equity loan rate when available but it won’t be simple. You’ll need to refinance your loan to get that new lower rate. And that will require all of the traditional refinancing actions you may already be accustomed to – shopping for lenders, checking (and improving your credit score), etc. A HELOC, however, won’t require any additional action on behalf of the borrower if rates fall in November and the months after as it will automatically adjust every month independently.
Save on refinancing closing costs
Not only can borrowers who chose a HELOC over a home equity loan avoid refinancing, but they’ll also save the costs of doing so. A home equity loan refinance can cost anywhere from 1% to 5% of the total loan amount. And it may take months, if not years, to break even on that upfront cost – at which point rates may have dropped again, raising the need to start the refinancing process all over again. So save the money, skip the extra steps and just go right to a HELOC application instead this November.
The bottom line
With another interest rate cut looming for November (and yet another for December), homeowners looking for extra financing would be well-served by opening a HELOC instead of a home equity loan now. Not only will they be automatically positioned for future rate cut benefits but they’ll save on out-of-pocket costs they’d otherwise have to pay to refinance a home equity loan. But November is quickly approaching and you’ll want to do your due diligence by shopping for lenders (you don’t need to use your current mortgage lender). So get started with a HELOC today and set yourself up for lower payments in the months ahead.
Matt Richardson is the managing editor for the Managing Your Money section for CBSNews.com. He writes and edits content about personal finance ranging from savings to investing to insurance.