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A cooler rate climate benefits a wide range of borrowers. From prospective homebuyers to current owners looking to refinance to those saddled with high rates on personal loans and credit cards, lower rates offer a welcome economic reprieve. They also require a different approach than what many have been accustomed to in recent years. And with the Federal Reserve officially cutting its federal funds rate for the first time in four years on Wednesday, now could be that time.
For those considering borrowing from their home equity, there are multiple options available. But a home equity line of credit (HELOC) is arguably the best and most cost-effective way to do so right now, particularly compared to home equity loans and cash-out refinancing. Below, we’ll detail why you should strongly consider borrowing with a HELOC as the Fed begins to cut interest rates.
Start by seeing how low of a HELOC rate you could secure here.
Why you should open a HELOC as the Fed cuts rates
A HELOC, for much of the last two years, has arguably been a less beneficial way to borrow from your home equity than a home equity loan. That’s because the latter comes with a fixed rate that will only change if refinanced. And that was a major advantage in a climate in which rates were raised numerous times between 2022 and 2023.
But that environment looks to be changing now.
With the first rate cut since 2020 issued this week, and two additional ones likely for November and December (when the Fed meets again), a HELOC could take the preferential place of home equity loans.
That’s because HELOC rates are variable and subject to change as the rate climate does (usually every month). That’s a drawback when rates are high and rising but now becomes a distinct advantage as rates cool again. With a HELOC, borrowers will automatically see their rate fall without having to refinance on their own.
Not only will they then save with a lower rate, but they’ll also save out-of-pocket costs if they had pursued a home equity loan. That’s because home equity loans come with closing costs to refinance (1% to 5% of the loan’s value, on average). But if you pursue a HELOC, you can add those savings to what you’ve already got back with the rate drops.
It’s not a perfect trade-off, and right now, home equity loans have better rates than HELOCs (8.46% versus 9.26%). But if you’re looking to position yourself for maximum savings ahead of additional rate cuts, a HELOC may be best to open now.
Get started with a HELOC today.
Don’t forget the tax benefits
A HELOC, in addition to the variable rate nature that benefits borrowers right now, also comes with tax advantages. Specifically, you can deduct the interest paid on the line of credit if you use it for eligible home repairs and renovations. At the same time, home equity loans also come with the same tax benefit. So carefully consider your intended use before getting started and don’t make this the deciding factor considering both options offer the same tax feature.
The bottom line
A HELOC could soon become the preferential home equity borrowing option, if it isn’t already. With a variable interest rate that is set to decline as overall rates do, borrowers could be well-positioned to realize additional savings in the future without having to do any of the work (or pay for any of the costs) associated with refinancing a home equity loan. But both borrowing options do have tax benefits, and other unique features, so weigh them carefully against one another to better determine which one is the right fit for you now.