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CBS News
29-04-2025
- Business
- CBS News
HELOCs vs. home equity loans: Which borrowing option is more affordable now?
We may receive commissions from some links to products on this page. Promotions are subject to availability and retailer terms. Homeowners should closely examine their home equity borrowing costs to determine short- and long-term affordability. Getty Images For most consumers, borrowing money right now is expensive. Credit cards come with double-digit rates (over 21%), and personal loans are pricy, too, averaging over 12% right now. If you're a homeowner, though, you have access to a lower-cost option: home equity products. With home equity loans and home equity lines of credit (HELOCs) you can snag rates under 9%. Despite their affordability, though, the two products aren't one and the same. In fact, both vary slightly in how their rates, upfront fees, and long-term costs work, so it's important to weigh your options before jumping in. Are you considering a home equity loan or HELOC now? Then it's important to understand what's more affordable now and what's likely to be more affordable in the future. We asked some experts to discuss how the costs measure up. See what home equity loan and HELOC rates you'd qualify for here. HELOCs vs. home equity loans: Which borrowing option is more affordable now? Traditionally, a home equity loan will have a lower rate than a HELOC. As John Aguirre, a mortgage originator at Loantown, explains, "Equity loans typically carry lower interest rates than equity lines of credit primarily because an equity loan is an installment loan. An equity line operates as a revolving credit line, similar to a credit card. It's primarily due to the risk factor involved with the two different types of products." Right now, though, conditions are a little different. HELOC rates are actually lower than those on most home equity loans, which can save you money — at least upfront — on your monthly payments. "Some institutions are offering lower introductory rates in anticipation of the Fed lowering the Fed funds rate," says Evan Luchaco, a home loan specialist at Churchill Mortgage. Currently, new HELOCs are averaging just 7.94%. Home equity loans, on the other hand, have rates in the mid-8% range. Just be warned that these conditions might not last long, Luchaco says. "Based on the most recent comments by Federal Reserve Chair Jerome Powell about keeping rates steady until the markets settle … the anticipation of the Fed lowering the funds rate is more unpredictable," he says. See how low of a HELOC rate you'd qualify for here. Which has lower upfront costs? If you're simply looking at the upfront costs of tapping your home equity, the decision is often a wash. As Aguirre puts it, "In my experience, equity lines and equity loans are typically going to carry the same upfront cost — mainly because they're going to go through a similar underwriting process." It really depends on where you get your loan and your financial profile, though. Some lenders will waive closing costs on all HELOCs, for example. Others might be more willing to do so if you have a higher credit score or present a low risk of non-payment. "Depending upon your credit score, debt-to-income ratio, the percentage of equity that you want to collateralize, the direction of interest rates and the state of the economy, the affordability of HELOCs or home equity loans will vary upon circumstance," says Bruce Maginn, a financial advisor at Solomon Financial. "It's vital to shop and compare not only the rates, but the costs, and negotiate these rates as low as possible. Good to excellent credit scores and a stable income history go a long way in your ability to negotiate with lenders." Which costs more in the long run? Though HELOCs have lower rates right now, they won't always be. They also usually have rates that are variable, meaning that they'll rise or fall over time, usually on a monthly basis for borrowers. As Maginn explains, "HELOCs frequently start off at a lower interest rate than the fixed rate of the home equity loan. However, as conditions change and the prime rate increases, the HELOC can quickly exceed the fixed nature of the home equity loan rate." With many HELOCs, you can make interest-only payments for the first 10 years of the credit line — called the draw period. Because of this, HELOCs can also add up to more in long-term interest costs, because you often won't start paying down the principal balance for many years, allowing for more interest to accrue than would have on a home equity loan. Learn more about your potential home equity borrowing costs here.
CBS News
19-03-2025
- Business
- CBS News
How far have HELOC interest rates dropped in the last 6 months?
Last September, getting a home equity line of credit (HELOC) may have been out of the question for homeowners looking to tap into their home equity. Rates rocketed up at the beginning of the month, nearly reaching 10%. HELOC rates may not have made sense for a lot of homeowners then even if a HELOC's strengths did. As a line of credit, HELOCs let you withdraw money as needed, up to your limit. In most cases, you make interest-only payments during the time you can withdraw money (" draw period "). Principal-and-interest payments typically only start when the draw period ends and the repayment period begins. Home equity loans , on the other hand, require monthly payments that include principal and interest once you receive your loan funds, making payments more costly in the short term. Much to the delight of homeowners with equity, however, HELOC rates have dropped over the past six months. But how much have they dropped and is now a good time to open a HELOC? We provide the answers below. See how low your HELOC rate could be now . When you borrow money, you often have a choice between two types of products: fixed-rate and variable-rate. Fixed-rate products have rates that remain the same. Variable-rate products have rates that go up or down over time based on several factors, including rate decisions the Federal Reserve makes . HELOCs use a variable rate, which is important when you look at how far HELOC rates have fallen over the past six months and why. The Federal Reserve ended 2024 with a series of three rate cuts : one each in September, November and December. While rate cuts aren't the only factor that influences HELOC rates, in this case, they seem to have made an impact. Here's how have far rates have dropped over the past six months, on a $30,000 HELOC, according to Bankrate: HELOC rates have fallen more than 1.9 percentage points since September. As of March 19, the average HELOC rate is 8.04%, down 1.95 percentage points compared to September 4. Furthermore, rates have hit two-year lows this year and have dropped below home equity rates . The considerable drop in rates since September is likely making homeowners wonder if now is the right time to open a HELOC. See what your HELOC options could be here . From a rates perspective, now is a good time to take out a HELOC. Don't get caught up in waiting for rates to drop more, because a HELOC's variable rate could go up just as easily as it could go down , says John Aguirre, owner of mortgage lender John Aguirre Home Loans. "There is no crystal ball," Aguirre says. "The truth is that there are so many factors that influence interest rates that timing the market is akin to gambling … If we're waiting for rates to get lower, now we're erring on the side of greed and it could come back to bite you." But figuring out if a HELOC makes sense for you right now is more than just looking at rates. Why you're opening a line of credit is important, too, Aguirre says. "Realistically we shouldn't be so focused on rate as we should on answering the question: Does this financing fit my needs and accomplish my goals," Aguirre says. Using a line of credit to fulfill a need such as an investment opportunity, debt consolidation or access to a financial cash reserve are reasons why a HELOC might make sense for you right now, he notes. Debt consolidation , in particular, can be helpful with interest rates still elevated and inflation a consistent concern. If you've decided now is the time to get a HELOC, Aguirre recommends taking a moment to identify the reason why you're getting the line of credit. If the need is related to an expense, itemize how much that expense will cost and then add a 5% to 10% buffer when you request your HELOC limit, Aguirre says. Additionally, he notes you can improve your chances of HELOC approval by paying down debt to lower your debt-to-income ratio , asking for a credit line increase to improve your credit utilization ratio (a metric that has a big impact on your credit score ) and finding ways to increase your income.
CBS News
27-01-2025
- Business
- CBS News
Can you refinance a home equity loan into a HELOC?
With credit card rates soaring and many consumers struggling due to lingering high inflation and the rising costs of various goods and services, many homeowners have turned to tapping their home equity for cash in recent years. In fact, about 234,000 home equity lines of credit (HELOCs) were originated in the first quarter of 2024, according to TransUnion. Around 237,000 home equity loans were issued for the same period. While both moves are smart and can save you money compared to other borrowing products, HELOCs currently have slightly lower interest rates than home equity loans. So, consumers in the latter cohort (those who took out home equity loans) might have a case for refinancing. Do you have a home equity loan and are thinking about refinancing to a lower-rate HELOC? Are you even allowed to by the lender? Below, we'll detail what you need to know. Start by seeing what HELOC interest rate you'd be eligible for here. Can you refinance a home equity loan into a HELOC? Refinancing is basically starting fresh. You'll swap a current loan with a new one — one with new terms, a new loan amount, a new interest rate and new payments. You can even change the lender if you like, too. "Yes, you can refinance a home equity loan just like any other loan," says John Aguirre, mortgage broker at Loantown. "You can refinance it into another home equity loan, a HELOC, or consolidate it into a first mortgage." How to refinance a home equity loan into a HELOC You have two options if you want to turn your home equity loan into a HELOC. First, you can apply for a HELOC, and then use the funds from that loan to pay off your home equity loan balance, which essentially rolls it into your new HELOC balance. "You could also refinance your first mortgage to absorb the home equity loan, and then add on the HELOC after the fact," says Rose Krieger, senior home loan specialist at Churchill Mortgage. In either case, you'll need to shop around and compare lenders (and rates), fill out your lender's application, and submit the required financial documentation. A credit check and appraisal of your home's value are typically required, too. "The process of refinancing a home equity loan into a HELOC isn't overly challenging," Krieger says. "You just need to work with a loan officer and provide loan documentation, such as pay stubs, W-2s, tax returns, bank statements, and current mortgage statements." Be prepared, though: The requirements for a HELOC can be strict. Aguirre says you will usually need at least 10 to 20% equity in your home and a debt-to-income ratio of 50% or less. As for credit score, he says, "Qualifications are going to vary per institution, but a good rule of thumb is that the lenders will require a 640 or higher FICO score." Learn more about your HELOC options online today. When should you refinance a home equity loan into a HELOC? Refinancing your home equity loan into a HELOC can be a smart move if you know you can secure a lower interest rate than what you're currently paying on the home equity loan. If you have other debts — like credit cards or personal loans — that have higher interest rates, it's smart, too, as you can use the HELOC funds to pay those off and save on long-term interest. "HELOCs typically provide lower rates than that of a credit card or personal loan, so this can be an effective move to better manage your debt," Krieger says. You might also want to refinance into a HELOC if you need continued access to cash. With home equity loans, you receive a single payment and that's that. HELOCs, on the other hand, allow you to withdraw funds over 10 years in most cases. This can be helpful if you're doing an extended renovation of your house or you want a financial safety net just in case. Just be aware: Home equity loans are usually fixed-rate products, while HELOCs have variable rates. This can mean your rate and payment could rise over time. HELOC rates change each month. As Aguirre cautions, "Be wary of refinancing out of a fixed rate HELOAN into a HELOC solely for a lower teaser rate, as this could expose you to higher interest rates later on." There are also closing costs to consider, so make sure you factor those in before applying for your refinance as well. The bottom line Whatever you do, make sure you prepare before refinancing any of your mortgage loans. Get your financial documentation in order, and pull your credit report to make sure there are no errors or accounts in collections. You can also work on improving your credit score, as this will reduce the interest rate you're able to get. Finally, shop around and compare several lenders. Institutions can vary widely on the products, rates, and fees they offer, so shopping around can ensure you get the best possible deal on your HELOC. .
