Today’s economy makes lending rates unpredictable, with recent high rates causing some to set aside plans to borrow money right now. However, if you need to borrow and you own your home, there is a better way to do it that is available exclusively to homeowners.
As a residential property owner, you have the ability to tap into your home’s equity to access funds through a home equity loan or home equity line of credit (HELOC). This type of borrowing can save you money because rates on home equity loans are typically lower than those for a personal loan or credit cards.
Additionally, home equity lending is considered a second mortgage, meaning you don’t have to refinance your first mortgage or change your monthly mortgage payments. In this blog, we’ll discuss how market trends affect home equity rates, so you’ll know the best time to get one.
What Are the Current Interest Rate Trends for Home Equity Loans?
Lending rates rose in 2022 and 2023 due to economic conditions that required the Federal Reserve, known as “The Fed,” to act on reducing inflation by increasing interest rates. As inflation now begins to drop, the Fed has plans to lower rates, which should reduce interest rates on home equity products.
The fight over inflation has made lending products more expensive. Also, higher rates on mortgages have made things more difficult for homebuyers, who are already facing a housing inventory shortage that makes finding a home more challenging.
Home equity-based lending was also affected. Over the past year, mortgage rates have slightly decreased, and experts believe that rates will gradually fall to as low as 5.75% by the end of 2024, according to Greg McBride, a chief financial analyst at Bankrate.com. A decrease in rates could potentially save the borrower on interest paid throughout the life of the loan.
How Do Housing Market Trends Affect Home Equity?
There are several factors about the housing market that can affect home equity. First, when the housing market is strong, home values tend to increase. This can directly increase the home equity you have available to you, meaning there’s more equity available for you to borrow against.
When the housing market is in a downturn, home values may decrease, which results in a reduction in your home equity and less money available to borrow. This can also make it harder to refinance your first mortgage or sell your home at a favorable price.
It’s important to note that market trends vary by region. Homeowners in areas of rapid growth may see increases in home equity while those who are living in stagnant markets may see slow equity growth. Real estate investors follow these market trends closely, which helps them make informed decisions about buying, selling or sitting on properties.
According to CBS News, inflation in April 2024 was at 3.4% and dropped to 3.3% in May, which wasn’t enough to decrease interest rates. This has created a standstill, with any rate change expected to occur over the next 24 months, and most predicting a slight decrease in rates, but no guarantees of when that might occur.
What Are the Key Economic Factors Influencing Home Equity Loans?
There are several economic factors that influence home equity lending. Among them are interest rates, housing market conditions, economic growth, credit market conditions and inflation.
When central banks such as the Fed increase rates, borrowing costs for lenders rise, which in turn increases the interest rates all around, including for home equity loans. Inflation expectations and economic growth also affect home equity loan rates. Stronger economic growth typically leads to higher employment and income, which makes lenders more willing to offer home equity loans to an increased pool of qualified borrowers.
As mentioned, the Fed plans to lower rates if inflation continues to drop. When interest rates begin to fall, you’ll likely see more people buying or refinancing homes, as well as more homeowners applying for home equity loans.
How Can Borrowers Maximize Their Home Equity in 2024?
The amount you can borrow with a home equity loan is based on the value or worth of your home. There are several things you can do as a homeowner to increase the value of your home, thereby maximizing your home’s equity.
- Make Additional Mortgage Payments: Reduce your principal to build equity faster.
- Renovate and Maintain: Focus on improvement projects that offer the highest returns on investment, such as kitchen and bathroom remodels, as well as energy efficiency upgrades. Also, regularly maintain your property and service your equipment.
- Refinance: If rates today are lower than your current mortgage, refinancing can reduce your payments and free up cash for additional principal payments. You could also refinance to a shorter loan term to build equity faster.
- Spruce Up the Neighborhood: Advocate for more local community improvement projects, such as new parks and renovated schools. These can increase property values in your area.
- Keep Up with Trends: Get regular property appraisals to stay current with your home’s market value.
When applying for a home equity loan, it is required to have 20% existing equity in your home, which is another reason why maximizing your home’s value is important. Also, you’ll need to have good credit, a low debt‐to‐income ratio, sufficient income and a reliable payment history to be approved for the loan. Having a good-to-excellent credit score lets you have more options when selecting a lender and gives you a better opportunity at a low interest rate.
How TCU Can Help
Travis Credit Union can help you find the right loan to fit your unique situation. No matter if you’re looking to buy a home, refinance one or tap into your existing home’s equity, we can help.
If you’re not a member, know that TCU is focused on your financial wellness. We’ll show you how you can Plan, Save, Spend and Borrow better so you’ll make informed financial decisions.
We serve 12 counties throughout Northern California, including Solano, Contra Costa, Alameda, Yolo, Sacramento and Merced. Visit traviscu.org to learn more about membership and how we can help you.