In one of our latest articles, we explored how homeowners can unlock their equity without giving up a record-low mortgage rate they may have locked in over the past couple of years.

According to a recent survey of 2,000 homeowners led by OnePoll and Figure, nearly half reported refinancing to secure a lower mortgage rate during the pandemic in 2020-2021. In this article, we’ll discuss who can benefit from a HELOC as mortgage rates continue to rise.

Homeowners financing a home renovation

With the shift to working from home, many homeowners are currently considering tapping their home equity to make home improvements, additions, or renovations.

Over 60% of homeowners surveyed reported having put off renovations as they don’t have the funds to support them. But that needn't be the case.

Many third-party financing options via contractors or major retailers are high-interest loans or revolving credit lines. With 30-year fixed interest rates now creeping above 4%, refinancing may no longer be a better option compared to a HELOC for homeowners who have more than 20% equity in their home. (Source)

Parents funding college tuition

In 2021, approximately 6% of parents reported using home equity to pay for college. For Federal Student Loans, undergrads are capped at $12,500 annually or $57,500 total. ($138k federal cap for Graduate Students.) The average public university student borrows $30,030 to attain a bachelor’s degree. (Source, pg 18)

Using home equity is a great option to pay for college tuition. It can be additive to financial aid, potentially offering lower rates than private student loans.

Other major purchases or debt consolidation

In the survey results, 3 in 5 were considering tapping their equity to make home improvements or consolidate debt. Other major purchases, such as paying for a wedding or covering health expenses, were also reported as recent use-cases for Figure’s HELOC.

Recent research has shown that if you have excellent or good credit and a mortgage rate below 3.50%, you could save on interest by using a HELOC to tap your home equity for cash, instead of a cash-out refinance, as interest rates rise.

Consider this example

Meet Jesse. Jesse is ready to add an office onto his home and is thinking about using a cash-out refinance to tap his equity. Recently, he refinanced his home and locked in a great rate of 2.9%.

He compares two options using the Figure Comparison Calculator.

  1. Keeping the 2.9% rate on his 30-year mortgage plus getting a 15-year HELOC at 7.37% APR
  2. Doing a cash-out refinance at 4.5% for 30-year mortgage (Source)

In this scenario, Jesse could save over $80,000 on interest payments by choosing to use a HELOC and keep his low mortgage rate. (Source)

In conclusion

There are many reasons why borrowers may need to tap their home equity, but depending on your scenario, it may not be financially beneficial to give up a low mortgage rate.

If you’ve been considering tapping your home’s equity for cash but are worried about rising mortgage rates, you still have options. With home values at an all-time high and rising, there’s never been a better time to consider using your home equity for a home improvement, debt consolidation, or to pay for an important purchase.

While there may be scenarios where a cash-out refinance could be better than a HELOC, it’s best to look at the numbers and understand the long-term costs associated with each option.

See how much you could save with a HELOC vs. a Cash-Out Refi.

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