Why Home Equity Loans and HELOCs Are Still Hot: Six Compelling Reasons
Introduction
As we move along into 2024, the resilience of home equity loans and HELOCs in the financial landscape remains evident. Recent data from the third and fourth quarters of 2023, while muted, revealed that the trend of robust home equity originations persists, building upon the levels observed in previous years. This trajectory suggests that homeowners continue to find compelling reasons to embrace home equity loans. In this article, we explore these reasons and examine the sustained popularity of home equity loans in the dynamic financial landscape.
1. Home Equity Interest Rates Are Expected To Come Down in 2024
Greg McBride, Bankrate’s chief financial analyst, expects HELOCs and home equity loans to be lower by the end of the year.
“Homeowners are sitting on a record amount of home equity, but borrowing costs have been at multi-decade highs,” says McBride. The latest data from the St. Louis Federal Reserve shows that American homeowners are sitting on record levels of equity — approximately $32 trillion.
HELOCs versus home equity loans often come with a very low introductory rate. Some lenders are advertising exceptionally low introductory HELOC rates for their customers that are far below the national average. When the Fed starts cutting interest rates, this will increase and accelerate home equity originations.
2. Flexible Use of Funds
Home equity loans and HELOCs stand out for their versatility. Borrowers appreciate the freedom to allocate funds as needed, whether for home improvements, college tuition, medical expenses, vacations, or other financial needs.
3. Tax Advantages
The tax benefits associated with home equity loans remain a significant incentive. The potential deductibility of interest payments adds a layer of financial advantage, making these loans a tax-efficient borrowing option for many homeowners.
4. Fixed Interest Rates
Home equity loans, often featuring fixed interest rates, provide borrowers with stability and predictability in their monthly payments. This contrasts with most HELOCs that usually offer variable rates, offering reassurance to those seeking financial consistency.
5. Interest Only Payments on HELOCs
Some lenders are now offering interest-only payments on HELOCs which offer low initial payments for those borrowers who don’t mind deferring principal payments in the short term to minimize monthly costs.
6. Paying Off Credit Card Debt
Since home equity loans have much lower rates than credit cards, they can be a smart option for paying off credit card debt. Borrowers trade the card's higher interest rate for the home equity loan's lower rate, reducing their monthly payments as well as the long-term interest costs.
Doing this allows borrowers to pay off debt quicker, according to Kendall Meade, a certified financial planner at SoFi.
For example, she says, if you had a $20,000 credit card balance at a 20% rate and made $400 payments each month, you would pay off the debt in nine years with a total of $43,360 in costs ($23,360 just in interest). If you used an 8% home equity loan and paid $405 per month, you'd pay that same debt off in just five years and save more than $19,000 in the process.
Conclusion
The steadfast popularity of home equity loans is underscored by the origination levels observed over the past few years. Looking forward, the 2024 forecast indicates a continued strong demand for these financial instruments especially with the anticipated interest rate cuts expected from the Fed. As homeowners explore their borrowing options, it is essential for lenders to consider innovative solutions.
New Vista Solutions offers a full suite of home equity settlement solutions, which includes our popular FastTrack Home Equity Bundle. This customizable package empowers lenders with a tailored solution, ensuring that they can meet their 2024 home equity program goals with flexibility and efficiency in the ever-evolving landscape of home equity lending.
To learn more about our Home Equity Solutions, schedule your free, no obligation demonstration today.
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