Is a home equity loan smart in today's economy?
Inflation fell again in February, giving millions of American borrowers hope that lower rates are on the horizon. That was the big takeaway Wednesday after the Bureau of Labor Statistics released its latest inflation reading, this time showing inflation dropping to 2.8%. The decline came after inflation increased in the previous four consecutive months. While a drop is always better than an increase, there's still work to be done to get the rate down to the Federal Reserve's target 2% goal. So, borrowers should remain cautious and strategic in their approach.
In today's economy, in which interest rates are elevated and cost-effective borrowing options are limited, many Americans may be considering turning to their home equity via a home equity loan. With the average amount of home equity up around 6% year-over-year to $313,000, this could be a viable alternative for many homeowners. But is it a smart move in today's evolving economy? Below, we'll detail three reasons why it may be.
Start by seeing how much home equity you could borrow here.
Is a home equity loan smart in today's economy?
For many homeowners in need of extra financing now, a home equity loan could be the smart way to secure it, particularly now that inflation is headed back in the right direction. Here's why it could still be the smart move in today's economy:
It has a lower interest rate than most alternatives
Home equity loan interest rates steadily declined in 2024 and currently stand as one of your cheapest borrowing options. As of March 12, the average home equity loan interest rate is just 8.40%. That makes it cheaper than personal loans at 12.37% and around three times less expensive than credit cards at around 23%. Because your home serves as collateral and those other two options are unsecured, lenders tend to offer lower interest rates on home equity loans. And, if you shop around, you may be able to find a lender offering a rate even lower than that 8.40%. This is particularly important when borrowing a large, six-figure sum of money and can add up to significant savings when matched against alternatives.
See what home equity loan rate you'd be eligible for here.
It has a fixed interest rate
Home equity loan interest rates are fixed, making them not only cheaper than credit cards, for example, but also safer and more reliable. With a home equity loan, borrowers can precisely determine what their repayments will be over time – and those won't change even if market conditions cause home equity loan rates to increase. Your home equity loan rate will remain the same unless refinanced. This structure is particularly advantageous now as it will provide peace of mind for borrowers, knowing that future market changes won't impact their monthly repayments the same way they would with a credit card or home equity line of credit (HELOC).
It can expedite debt pay-off
If you're already coping with high-rate credit card debt, a home equity loan can be the smart way to pay it off now. Since home equity loans come with rates so much lower, you can use the former to pay off your credit card debt now, perhaps in a much quicker manner than if you were just paying minimum payments on your debt each month. This is a particularly timely benefit now that credit card rates are hovering near record highs (and inflation still too high to warrant significant credit card rate drops anytime soon).
The bottom line
Borrowing from your home equity should always be approached cautiously, as you could lose your home to the lender if you can't make your repayments. But in today's unique economic climate, in which inflation is falling again but the economy is still uncertain, it can still be an advantageous way to borrow for many homeowners. By taking a well-informed and strategic approach to your home equity now, you can improve your chances of borrowing success with a loan both immediately and long-term.
