By Dan Rafter
Nov. 22, 2024
Key Takeaways
- Mortgage interest rates remain higher than a year ago and much higher than the lows they reached in early 2021.
- If your current mortgage rate is much lower than the national average right now, you may not want to move or refinance. Instead, you could consider a home equity loan.
- Home equity loan rates are higher than mortgage rates, but they’re still lower than the average interest rates on credit cards and personal loans.
- Home equity loans are a good choice for funding home renovations and other big-ticket costs because of the tax breaks that come with them.
Is taking out a home equity loan still a good choice to finance home improvements or other big-ticket purchases even as mortgage interest rates remain elevated? It might be, depending on your financial situation and how you plan on using the funds from a home equity loan.
The Federal Reserve on Nov. 7 lowered its benchmark interest rate by another quarter percentage point.1 That follows a rate cut of a half percentage point in September. While the fed funds rate is now lower, mortgage rates remain elevated, with Wednesday’s 30-year new purchase average sitting at 6.90% and the average 30-year refinance rate at 7.12%, according to Zillow mortgage rate data provided to Investopedia.
Depending on when you bought your home, interest rates might not be low enough for a mortgage refinance to make financial sense. And you might not feel as if you can move because your current interest rate is much lower than the rate you’re likely to get with a new mortgage.
A home equity loan may be able to help. With these loans, you can borrow against your home’s equity, using the money for whatever you want, including major renovations that can make living in your home more pleasant. Like mortgage rates, home equity loan rates can fluctuate day to day depending on what lenders decide to charge borrowers based on economic factors. Depending on your credit score, you may qualify for home equity loans with rates under 8.00%, making these loans a less expensive way to borrow money than a credit card or personal loan.
Mortgage Rates vs. Home Equity Rates
Home equity loans are attractive largely because they are an affordable way to borrow money. And they remain so even during this time of higher interest rates.
While average mortgage rates by state are between 6.70% and 7.00% as of Wednesday, rates for home equity loans tend to be a little higher, though they are typically lower than the rates on credit cards or personal loans. The average credit card interest rate was 24.37% as of Nov. 1, according to Investopedia’s credit card database of over 300 credit cards. The average personal loan interest rate was 26.11% as of Nov. 1, according to Investopedia’s analysis of data from 18 lenders.
Depending on your credit score, though, you may be able to qualify for a home equity loan with an interest rate of 8.00% or less.
For example, today Navy Federal Credit Union is advertising a home equity loan with an annual percentage rate (APR) of as low as 7.34%, with terms ranging from five to 20 years.2 Discover is advertising home equity loans with terms up to 30 years and APRs of 8.00% to 12.42% today.3 First Financial Bank says that you can qualify for a home equity loan with an APR as low as 7.35% today, with a term of up to 25 years.4
How Home Equity Loans Can Help You Upgrade Your Living Situation
Depending on how much equity you have in your home, you can use home equity loans for whatever you’d like. One of the best ways to use a home equity loan? A home renovation or remodel.
That’s because when you use the funds from a home equity loan for a remodel or renovation, you can deduct the interest you pay on your income taxes, reducing your tax bill.5
While you can use the money from a home equity loan for other things like paying off high-interest-rate credit card debt or helping to pay for a child’s college education, you can’t deduct the interest you pay. That savings only applies when using a home equity loan to pay for home improvements that increase the value of your home.
How much can you borrow with a home equity loan? That depends on the amount of equity you’ve built.
Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $350,000 and you owe $200,000 on your mortgage, you have $150,000 of equity. You can then borrow a percentage of that equity, often up to 80%.6
So if you have $150,000 in equity, you can usually borrow up to $120,000. You’d receive that money in one single payment that you’ll pay back each month with interest.
To determine your equity, your lender will first send an appraiser to your home to determine its current market value. And your equity may be more than you realize. As of the second quarter of 2024, the average U.S. homeowner gained about $25,000 in home equity when compared to the same quarter a year earlier, according to CoreLogic's most recent equity report. CoreLogic said that existing homeowners averaged about $315,000 in equity as of the second quarter.7
Home equity loans are a good choice for homeowners with a significant amount of equity who want to fund a large project. Depending on your equity, you can usually borrow more with a home equity loan than you can with a personal loan.
To make a home equity loan worthwhile, though, you typically must have owned your home long enough to build a significant amount of equity. If you have a low amount of equity, you won’t be able to borrow enough to cover the costs of a more expensive project.
Just be careful: A home equity loan is a second mortgage that uses your home as collateral. If you fail to make your payments, your lender can start the foreclosure process against you.
Understand, too, that a home equity loan is not the same as a home equity line of credit (HELOC). HELOCs act more like credit cards with a credit limit based on the equity of your home. With a HELOC, you can borrow up to your credit limit, only paying back what you borrow.
Article Sources
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- Federal Reserve. "Press Release Nov. 7, 2024: Federal Reserve Issues FOMC Statement."
- Navy Federal Credit Union. "Home Equity Loans."
- Discover Home Loans. "Home Equity Loan Rates."
- First Financial Bank. "Home Equity Loans and Lines."
- IRS. "Is Interest Paid on a Home Equity Loan or a Home Equity Line of Credit (HELOC) Deductible?"
- Federal Trade Commission Consumer Advice. "Home Equity Loans and Home Equity Lines of Credit."
- CoreLogic. "Homeowner Equity Insights – Q2 2024."