From 2020 to 2022, interest rates dropped to an all-time low with rates ranging from 3-to-5 percent, making it the perfect time for South Carolina homeowners to take advantage of Home Equity Loans and Home Equity Lines of Credit (HELCOs).
In today’s rising rate environment, some homeowners wonder if a Home Equity Loan or HELOC is worth it. The short answer is yes.
Understanding Home Equity Loans and Lines of Credit
Home Equity Loans and HELOCs are types of loans that allow you to borrow against the equity that you've built in your home. In order to determine if a Home Equity Loan or HELOC is the right choice for you, it is important to understand the difference between the two loans.
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Home Equity Loan - A Home Equity Loan allows homeowners to borrow a lump-sum of money from the equity in their home with a fixed interest rate, set monthly payment and no rate or payment increases during the loan term.
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Home Equity Line of Credit - A HELOC is a line of credit that allows homeowners access to cash as needed from the equity in their home. The interest rate is adjustable based on the market rate at the time the equity is accessed. A HELOC is a revolving loan that has a draw period (typically lasting between 5 and 10 years) and a repayment period. During the draw period, the homeowner can borrow funds up to a specified limit, pay it back, and borrow again until the draw period ends. Once the draw period ends, funds cannot be accessed and the borrower must start paying back both interest and principal. This is known as the repayment period. During repayment, the borrower will make monthly payments over a set term (usually up to 10 years) to pay back any balances in full. If the balance is already at zero at the end of the draw period, the HELOC will typically close.
Factors to Consider in a Rising Rate Environment
When South Carolina homeowners consider a Home Equity Loan or a HELOC during a rising rate environment, there are several factors to take into consideration. Here are some of the factors that may affect these loans.
Important Factors When Considering a Home Equity Loan or HELOC in a Rising Rate Environment
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Interest Rates - The cost of borrowing money is always an important thing to consider when talking about loans. Higher interest rates mean Home Equity Loans and HELOCs may be more difficult to qualify and pay for. Locking in a low rate for a Home Equity Loan is a savvy plan that allows lower payments for the term of the loan, while accessing equity via a HELOC while rates are high means a higher payment each time the equity is accessed.
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Market Conditions - Current housing market trends also have an impact on the equity you have in your home. When the South Carolina real estate market is experiencing a higher inflation rate, this is good and bad news for homeowners. It can mean higher interest rates for Home Equity Loans and HELOCs, however, it can also mean an increase in the value of your home, giving you access to more equity.
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Seasonality - In addition to interest rates and market conditions, the time of year can also influence a Home Equity Loan or HELOC. The Federal Reserve meets annually in March to discuss rates. Any lower interest rates would take effect in May or June, making late spring into early summer the prime time to consider a Home Equity Loan or HELOC.
Practical Uses of a Home Equity Loan and HELOC in a Rising Rate Environment
When it comes to choosing between a Home Equity Loan and a HELOC, your financial needs can determine the best loan option for your situation. Here are some examples of when to choose each type of loan.
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Lowering Debt - A great use of a Home Equity Loan for those in South Carolina is to consolidate high-interest debt to lower payments and save on interest. Often times, Home Equity Loan rates are lower than credit card interest rates and even other loans such as Personal or other loan types.
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Emergency Fund - A HELOC is the best option for creating an emergency fund. Even though the rates are ever-changing, it allows the homeowner to access funds easily and quickly with great flexibility.
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Educational Funding - A Home Equity Loan or HELOC may be an affordable alternative for paying for college expenses. With educational costs rising, a Home Equity Loan or HELOC could be a good fit your family's financial needs to supplement federal or state funding.
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Fixed Amount for a Project - If your needs require funds for a project with a defined budget, a Home Equity Loan with a fixed interest rate with the same monthly payment would work best to keep your budget in check.
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Home Repairs and Improvements - A Home Equity Loan or HELOC is a smart choice for those who need to finance a renovation or repair project to increase their home's value. Depending on the type of project and the time for completion you may consider taking out a lump sum with a fixed payment for a large project or use a HELOC to fund smaller projects that you can payoff in a shorter amount of time. Both options can be used to make improvements that will increase your property's market value.
Are You Ready to Learn More About a Home Equity Loan or HELOC for Your Next Home?
If you're considering leveraging your home’s equity in a rising rate environment, it is important to understand all of your options. Working with an experienced lender can give you a huge advantage and help you learn how interest rates, monthly payments, and closing costs can affect your choice. At Carolina Trust, our team of lenders will help guide you to the right loan option so you can make an informed decision that will best fit your unique situation. Contact us today!
