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In the current economic landscape, home equity borrowing is experiencing a downward trend in interest rates. Since the beginning of the year, rates on home equity lines of credit (HELOCs) have decreased by approximately 1.5 percentage points, while home equity loans have seen a reduction of about half a percentage point. This development is particularly beneficial for many homeowners, as the average household now holds around $330,000 in home equity.
Despite these promising figures, the economic situation has been shifting throughout the year, characterized by a reduction in inflation rates and the issuance of interest rate cuts. With notable cuts of 50 basis points in September followed by a quarter-point reduction in November, homeowners weighing the timing of drawing on their home equity might be contemplating whether to wait for even lower rates. However, this approach could carry significant risks.
Below, we outline four key risks tied to delaying the extraction of home equity in hopes of securing a better interest rate.
4 Risks Associated with Waiting for Home Equity Loan Interest Rates to Decrease
There are multiple reasons to be cautious about postponing access to home equity loans. Here are four primary concerns:
1. Interest Rates Might Rise
Home equity loan rates tend to be more sensitive to changes in the federal funds rate compared to standard mortgage rates. While the Fed has implemented two cuts this year, inflation rates showed a slight increase in October, which could prompt the Federal Reserve to reconsider further cuts or even increase rates if inflation continues to rise. Waiting for a lower rate under an uncertain economic outlook could lead to missed opportunities for securing competitive home equity loan rates available now.
2. Debt Management Challenges
Credit card interest rates have surged to an average exceeding 23%, making it crucial for homeowners considering home equity for debt consolidation to act swiftly. The impending holiday season is likely to exacerbate financial strain as spending increases. Hoping for lower home equity rates while carrying high-interest debt could lead to an overwhelming financial situation, making timely equity borrowing a wise choice.
3. Potential Loss of Tax Deductions
Delaying home equity borrowing could postpone important tax deductions related to major home renovations or repairs. The interest on home equity loans and HELOCs is tax-deductible if used for qualified purposes. If borrowers wait until the new year to secure funds, they may miss out on writing off interest for the entire year, affecting their tax filings and potentially delaying financial relief until they file their returns in 2026.
4. Impact on Credit Scores
The advertised home equity loan rates are typically reserved for borrowers with excellent credit standings. Should a homeowner’s credit score decline—perhaps due to holiday spending or failure to manage existing high-interest debt—the better rates they currently qualify for could be lost. This highlights the importance of acting decisively if the need for funds is immediate, especially for those with current favorable credit ratings.
Conclusion
There is always a degree of risk involved in timing financial decisions. In the realm of home equity borrowing, these risks are particularly pronounced in the face of changing economic conditions. Homeowners must carefully evaluate their needs against the potential dangers of waiting and may benefit from consulting with a financial advisor for tailored guidance.
Source
www.cbsnews.com