The Federal Reserve has set the wheels in motion and for the first time in nearly a decade, interest rates are on an upward trajectory. The initial hike was a modest one quarter of one percentage point — not a game changer for most investors or consumers. And from what Fed Chairwoman Janet Yellen telegraphed in her remarks following the mid-December, 2015, announcement, the Fed plans to move with caution and lift rates very slowly over the next few years.
That said, for homeowners contemplating refinancing their mortgages or tapping the value of their home via home equity borrowing, carpe diem may be the message to be heeded.
Positive Sales Trends
Data gathered during the first three quarters of 2015 found that single-family home and condominium sales reached their highest level in nine years. Further, those who sold their homes in the third quarter of 2015 also garnered the biggest price gains in eight years — an average of 17% over their purchase price.1 Rising home values and historically low interest rates have also stimulated refinancing activity. According to data reported by The New York Times, refinanced loans represented 42% of lenders’ loan volume in September of 2015 — a 5% increase over August and the highest level reached since May.1
The same trend is in evidence as homeowners are tapping into the equity they have built up in their homes and using the cash for a range of purposes. Here are 10 good reasons to borrow, cited by banks and other types of consumer lenders.
Top 10 Reasons to Consider Tapping Home Equity
- Refinance higher-cost debt.
- Pay off higher interest credit card debt, then redirect freed-up cash to retirement savings.
- Take advantage of potential tax breaks.
- Avoid liquidating a solid investment, or better time a capital gain.
- Refinance retirement plan loans that would be difficult to repay immediately if employment ends.
- Refinance life insurance policy loans that are approaching the cash value.
- Enhance liquidity with an emergency fund.
- Help a family member with college tuition, a home down payment, or a business start-up.
- Stop deferring a significant purchase or project that could be more expensive in the future.
- Take advantage of what may be a limited opportunity to lock in an exceptional deal.
If you are thinking of tapping the equity in your home and need a refresher on what type of borrowing vehicle is right for you, consider the following at-a-glance comparison:
Home Equity Loans and Lines of Credit — What’s the Difference?
|Home Equity Loan||Home Equity Line of Credit (HELOC)|
|Fixed interest rate for the life of the loan||Variable interest rate over the life of the loan|
|Repayment in regular installments over a specific period of time||Option to re-borrow as loan is paid, up to approved credit limit|
|Typically used for single large purchase, such as a car||Typically used to fund ongoing expenses, such as home renovations, borrowing only as needed|
|Entire amount of loan received upon approval||Checks can be written at any time, up to approved limit|
Keep in mind that historically, home values have gone down as well as up, and a sustained decline could limit the financial options for those with significant loan balances. For more information or to obtain current rate data, contact your banking institution, credit union, or other consumer lender.
1Source: The New York Times, “Cashing in on Home Equity,” November 13, 2015.
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