Many people tap into their home’s equity with either a home equity loan or a home equity line of credit (HELOC). They may use the money they borrow for a home improvement project, to buy new appliances, or for something else.
A question that borrowers must consider before applying, however, is which type of loan is best when interest rates are rising?
To answer that question, it’s important to take a look at the current interest rate environment and where rates are headed in the near future. Also, a comparison of how interest works with both HELOCs vs. home equity loans can help you determine which option is best for your needs.
Where Are Interest Rates Headed?
Although it’s impossible to predict what interest rates will be in the future, many analysts are expecting them to increase. Analysts at Bankrate, for example, believe that at least two rate increases will happen soon. This could result in an increase of at least half a percentage point. The Federal Reserve has also indicated that rates will go up.
Fixed vs. Variable Rates
When considering HELOCs vs. home equity loans, it’s important to understand the difference in how interest works with the two loan options.
Home equity loans have fixed interest rates. The interest rate is locked in when the loan is created, and you will make equal monthly payments over the life of the loan until it is repaid. Knowing how much you will have to pay each month is helpful with budgeting. It ensures there will be no surprises if interest rates increase sometime in the future.
HELOCs, on the other hand, usually have variable interest rates. Because the rate periodically changes, there is no way to predict how much you will pay in interest in the future. Variable interest rates may not be a problem for those who borrow and repay small amounts at a time. It depends on how you will be using the loan.
An interesting benefit of HELOCs is that you do have the option of making interest-only payments during the draw period, which is the time that the HELOC is active and you can borrow money. Although the interest rate may increase, interest-only payments may be an affordable option when money is tight.
Even with a rate increase, HELOC interest rates are usually more affordable than other financing options, like credit cards, store cards, pawnshop loans, and payday loans.
HELOC vs. Home Equity Loan: Which Option Should You Choose?
Because everyone’s financial situation is unique, the right borrowing option will depend on several factors. You want to consider how much you need to borrow, the equity you have in your home, and how much time you need to repay it.
If you need to borrow money in stages to complete a project, a HELOC is a good choice. The flexibility of these loans is hard to beat, and an increase in the interest rate may not impact your budget too much since you won’t be borrowing a large lump sum.
If you want to borrow a large amount and you have significant home equity, the best option may be a home equity loan. You can lock in a fixed rate and make equal monthly payments over the life of the loan until it is repaid. You will not be impacted by future rate increases.
Take Advantage of Your Home’s Equity with TEG Federal Credit Union
TEGFCU offers both home equity loans and HELOCs to meet your borrowing needs. With our home equity loan, you can borrow between $25,000 and $250,000. Repayment terms of up to 15 years are available with a fixed interest rate. There are also no closing costs so you don’t have to worry about any extra expenses.
If you need the flexibility of a line of credit, you can borrow between $25,000 and $250,000 with our variable interest rate HELOC. The initial advance is for $5,000, and there are no minimum requirements for additional advances.
When you borrow money with our HELOC, you can receive the funds in person, by transfer, or by check. The draw period can be up to 10 years, and the repayment period can be up to 15 years, so you won’t have to worry about a balloon payment when the draw period ends. Like our home equity loans, our HELOCs also don’t have any closing costs.
Applying for either a home equity loan or HELOC with TEGFCU is easy. You can either apply online or in person. And if you have any questions, one of our loan officers will be glad to assist you.
Click below to learn more about our home equity loans and HELOCs and to see how easy it is to get started.
