There's good news if you refinanced your mortgage in 2020 or 2021. This was a historically great time to receive a fixed-rate mortgage on your home and receive favorable terms. However, even with people receiving mortgages for less than 3% interest during that time, it doesn't mean that now is a bad time to obtain a home loan. If you look at the economic headlines all around us, you'll see trouble with inflation, rising interest rates, and increased cost of living, including higher rent prices.
There's an old saying: the best time to plant a tree was twenty years ago, but the second-best time is today. That logic may hold up in the present environment. Mortgage rates are risingto over 5% in early May of 2022. With rates going up and potentially continuing to go up for the foreseeable future, it only makes sense that anyone thinking about securing a home loan might be thinking about doing it sooner rather than later.
But not all home loans are strictly built for acquiring a new home. A cash-out refinance, for example, lets you borrow against the existing equity in your home. When there's a surplus, you can take "cash-out," which gives you extra cash for renovations, repairs, or a wide variety of purposes that might suit your current financial situation, like consolidating debt.
However, there is one downside.
A cash-out refinance can be expensive, especially in a rising interest rate economy. And it requires borrowing a large sum of money to access your equity, which can mean paying off a lot in interest over the long term.
Feeling stuck? There's another option for a loan that can help you get through this economic and personal financial situation with more favorable terms.
A HELOC lets you keep your mortgage and still cash out
Here's where the good news enters the picture. If you're a homeowner trying to get cash from your home equity, there's a solution to your dilemma. The answer is a HELOC. A Home Equity Line of Credit is a new loan, not a restructuring of an existing mortgage. And with this loan, you can borrow a smaller amount against your home's equity. This makes it more affordable, as the interest payments won't stack up substantially against you in the way they might in a cash-out refinance. A fresh loan grants homeowners the possibility of cashing out of existing equity, but it doesn't mean you have to touch the underlying fixed-rate mortgage you already have.
In that way, a HELOC can be like a lifeline: it straddles the middle path of not tapping into your home equity, and not requiring you to start over with a new home loan.
You can use a HELOC to keep your existing fixed-rate mortgage while tapping your home equity for renovations. And given that about half of all home-owning Americans considered home renovations in 2021, it's clear you're not the only one with these sorts of thoughts. HELOCs may be the best, and sometimes the only, option for getting it done in an affordable way.
Equity is enticing, but interest rates are Rising
Home prices have been on fire in recent years, and we mean in a good way for homeowners. The problem, for many homeowners, is that this equity is only the paper value of their home. It can seem difficult to turn it into real cash—cash that can accomplish things like renovations, repairs, debt consolidation, and more. And because a cash-out refinance can be so expensive with rising interest rates, it can feel like homeowners are stuck when interest rates go up. They feel as though they can either stay in their new home or move, with few options in between.
But home equity isn't just a buy-or-sell proposition. For example, you can borrow against it to finance a kitchen renovation that would improve the quality of your daily life. You can borrow against it to pay off a high-interest personal loan or consolidate consumer debt into one typically lower-interest rate HELOC.
A cash-out refinance can add to your financial stress
The problem with a cash-out refinance is that higher interest rates on larger loans can add up to expenses in a hurry. Paying off a cash-out refinance can feel like a setback. And why should you have a setback when home prices have been so advantageous for homeowners in recent years? Consider that according to the OECD, long-term interest rate trends in the U.S. are headed upward. They haven't declined since last year, 2021. So what's happening? Higher interest rates are moving up in line with expectations of inflation.
If interest rates are going up, it means that a cash-out refinance will only get more expensive and costly as time goes on. This forces investors to seek alternatives for loans that can give them the funds they need to tackle their ambitions. In such an environment, homeowners need to find another way of securing equity that doesn't break their bank accounts.
What can you use a HELOC for?
Home renovation is a common use for HELOCs. But there are other options at your disposal. HELOCs allow you to tap into home equity, but they can be surprisingly open-ended, giving you the flexibility to handle a range of options, including paying off debt. Debt includes medical bills, credit card bills, business expenses, and student loans. Student loans are a big concern for the young home-owning generation, representing $1.6 trillion in total debt. Medical debt can also be a terrible burden for families who don't have good ways of securing money to help pay it off. A HELOC, secured at a healthy interest rate, can potentially help pay off these debts without increasing the interest rate on the underlying mortgage.
How a HELOC from Figure works
HELOCs offer tremendous flexibility. With a fixed-rate1 model for HELOCs, a loan from Figure can potentially add stability to the financial situation you find yourself in. And if interest rates are only going higher, there may never be a better time to borrow against your home's equity.
What are the next steps? Click "Find my Rate" here at Figure, enter your information, and apply for a HELOC. You'll be surprised at how fast approval can be granted, and once it is, you have funding initiated in just five business days.2
1 The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the initial draw's.
2 Approval may be granted in five minutes but is ultimately subject to income and employment verification. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person. closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and need to order a desktop appraisal to confirm the value of your property.