Home Improvement Doesn’t Have to Raise Your Mortgage Rate

Couple Painting Their Home

With the increase in home values and interest rates, many homeowners are finding themselves “house rich, cash poor,” meaning they have more equity in the value of their home than in liquid assets. While this isn’t always a bad thing, if you are a homeowner looking to consolidate debt, fund a college education or start a home improvement project, you may feel strapped for cash.

However, there are options. Homeowners who are looking to make changes to their home can refinance with the amount for the new loan rolled in, use credit cards or take out personal loans. But one of the best options, considering today’s home values and interest rates, may be a home equity line of credit, or HELOC. 

What Is a HELOC?

Home equity is the difference between what you owe on the mortgage and what the home is currently worth. In other words, if the value of your home exceeds what you owe on it, you can borrow a percentage of the equity, depending on your situation. Your home is the collateral you borrow against, and you can do this through a home equity loan or a home equity line of credit.

The home equity loan comes with fixed payments and a fixed interest rate. The home equity line of credit is a revolving credit account that typically comes with varying minimum payment amounts and a variable interest rate. 

There are a ton of reasons why people would prefer a HELOC over a mortgage refinance or home equity loan.  

Why Consider a HELOC?

First, it’s important to look at why refinancing may not be the best option right now. In December 2020, the mortgage rate for a 30-year fixed mortgage was 2.68%, according to Freddie Mac’s historic graphs. But Forbes.com reported in late May 2022 that the average rate is now 5.54% for the same 30-year fixed mortgage. If you refinanced when rates were low, then refinancing now could leave you with a higher rate, and a higher payment.

In addition to allowing you to keep your low interest rate, a HELOC also allows you to borrow only what you need. The interest on your line of credit may be tax-deductible, but remember you should always consult a tax advisor regarding the deductibility of interest and charges to your home equity line of credit. 

Another big reason to consider a HELOC is the flexibility to use the money however you want. It’s not limited to home improvements.

So if a HELOC is such a good option, what are the downsides? You also are using your home as collateral, which means you could lose your home if you fail to repay the loan. Another thing to consider is that you are reducing the equity in your home, which could leave you upside down on your home if the market goes down.

If you’re on the fence about your best option, consider using an online calculator to see the difference between a refinance and a HELOC. 

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