Should You Take Out a Home Equity Loan When Interest Rates Are Rising?

Interest rates are rising fast, with many speculating that they will continue to rise throughout the year. If you’re sitting on a high balance of variable interest rate debt, is now a good time to take out a home equity loan before rates climb even higher?

Key Takeaways

  • Nobody can accurately predict future interest rates.
  • As of May 2022, rates are rising quickly but still low historically.
  • Rolling variable interest rate debt, like a home equity line of credit (HELOC), into a fixed-rate option like a home equity loan could save you money if rates continue to climb.
  • Be careful when rolling unsecured debt like credit card debt into debt that uses your home’s equity as collateral. You could lose your home if you can’t keep up with payments.
  • Don’t take out a home equity loan before you actually need it, especially if you have uncontrolled spending habits.

Understanding Interest Rates

While there is an entire industry of experts centered around analyzing market trends and predicting future interest rates, nobody can predict future interest rates with 100% accuracy. As of May 2022, the Federal Reserve (Fed) has raised interest rates several times this year in an effort to curb inflation. The latest increase of half a percentage point was the largest interest rate hike in more than 20 years, with many expecting rates to increase by another half a percentage point in June.

While interest rates are rising quickly and much higher than they have been since the mid-2000s, they are still historically low compared with previous decades. From 1980 to 1990, rates fluctuated from 9.04% to 18.45%.

How Interest Rates Affect You

If you have a variable interest rate on something like a credit card or a home equity line of credit (HELOC), then interest rate hikes affect you directly. When the interest rate on your debt increases, the minimum monthly payment increases as well. If you can’t afford for your monthly payments to increase, paying your debt down as aggressively as possible now and rolling it over into a fixed-rate option like a home equity loan or a personal loan before rates increase further is a good idea.

Should You Take Out a Home Equity Loan?

Many financial advisors specifically advise against taking out a home equity loan for anything other than funding projects that will directly impact your home’s equity. Some advisors even advise against them for any situation. Thanasi Panagiotakopoulos, a certified financial planner (CFP) and founder/chief executive officer (CEO) of LifeManaged, says that primary residences account for more than half of a typical American’s net worth. In his opinion, people who view this equity as a way to get cheap home equity loans are damaging their future financial freedom.

Panagiotakopoulos’ advice? “Don’t get a home equity loan.”

Should You Roll Debt Into a Home Equity Loan?

If you are already carrying a high balance of variable interest rate debt like a HELOC, now is the time to roll it over to a fixed-rate home equity loan, especially if you won’t be able to keep up with payments if your interest rate goes up, says Jessica Goedtel, a CFP and owner/founder of Pavilion Financial Planning.

Foreclosure Risk

Fixed rates for a home equity loan are lower than on unsecured debt like a credit card or a personal loan because they use the equity that you have in your home as collateral. If you can’t pay back a home equity loan, you could lose your home. Be cautious before rolling credit card debt into a home equity loan if you’re unsure of your ability to pay back the loan. Consider a fixed-rate personal loan instead.

What is the difference between a home equity line of credit (HELOC) and a home equity loan?

A home equity line of credit (HELOC) and a home equity loan both allow you to borrow money using the equity that you have in your home as collateral. A HELOC functions more like a credit card: You are approved for a credit line up to a certain amount and can choose how much of that credit line to use. A home equity loan is typically a lump sum loan for a set amount with fixed monthly payments and a fixed interest rate, as opposed to a variable interest rate loan.

Can you qualify for a tax deduction with a home equity loan?

You could potentially qualify for a tax deduction with your home equity loan, but don’t bank on it making a significant difference in your tax bill. The interest that you pay on your home equity loan is deductible only for the portion of the loan that you use to buy, build, or substantially improve the home that secures the loan. With the standard deduction so high—$12,950 for single filers in 2022—the interest alone paid on a home equity loan isn’t usually worth itemizing deductions. Check with your tax professional to see if itemizing could save you money.

Should I refinance or take out a home equity loan to pay for a big project?

That depends on how much money you need, how much equity you have in your home, and the rates and fees for each option. Running a mortgage calculator comparing both options can give you a clearer picture about which will save you money once you have estimates from lenders for both.

The Bottom Line

If you already have a high balance on a variable interest rate HELOC, then rolling that debt into a fixed-rate home equity loan may save you money in interest if rates continue to increase—as many have predicted. For any other purpose, taking out a home equity loan carries additional risks that need to be considered carefully.

Article Sources
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  1. Federal Trade Commission, Consumer Advice. “Home Equity Loans and Home Equity Lines of Credit.”

  2. Reuters. “Fed to Raise Rates Aggressively in Coming Months, Say Economists: Reuters Poll.”

  3. NPR. “The Fed Raises Interest Rates by the Most in Over 20 Years to Fight Inflation.”

  4. Freddie Mac. “30-Year Fixed-Rate Mortgages Since 1971.”

  5. Consumer Financial Protection Bureau. “What You Should Know About Home Equity Lines of Credit,” Page 7.

  6. Consumer Financial Protection Bureau. “What Is a Home Equity Loan?

  7. Internal Revenue Service. “Interest on Home Equity Loans Often Still Deductible Under New Law.”

  8. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

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