Understanding the Potential Hazards of Borrowing Against Your Home
In recent years, many homeowners have taken advantage of historically low mortgage rates to finance home renovations or other expenses by borrowing against their homes. This has been particularly common for those with a home equity line of credit (HELOC), which allows borrowers to access funds as needed. However, as interest rates have begun to rise, it is important for homeowners to understand the potential hazards associated with borrowing against their homes.
According to the Federal Reserve Bank of St. Louis, the average fixed rate on a 30-year mortgage reached 6.77 percent in February 2024, a significant increase from the below 3 percent rates seen in mid-2020. This means that those who purchased their homes between 2011 and early 2022 may be hesitant to give up their low fixed-rate loans. However, homeowners with variable-rate HELOCs are not shielded from rate increases.
The number of HELOCs originated in the second quarter of 2023 increased by nearly 13 percent over the prior quarter, according to property data provider ATTOM. This indicates that many homeowners have turned to HELOCs to finance renovations or other expenses. However, as interest rates have risen, so have the average rates for HELOCs, jumping from less than 4 percent to about 9 percent during the rate-hiking cycle.
This increase in rates has significant implications for borrowers. Loan payments that once fit comfortably within their budgets may now take up a much larger portion of their income. If borrowers find themselves struggling to keep up with their HELOC payments, it is crucial to reach out to their lenders immediately to discuss their options.
Jacob Channel, a senior economist for online lending marketplace LendingTree, advises homeowners to contact their lenders to explore potential solutions. In some cases, lenders may be able to offer rate adjustments or other options that can help borrowers keep up with their bills. Taking proactive steps and engaging in open communication with lenders is key to avoiding financial difficulties.
Furthermore, homeowners may also need to reassess how they use their HELOCs. In the past, many individuals used these lines of credit as emergency funds, rather than keeping money in low-interest savings accounts. However, with the availability of high-yield savings accounts offering interest rates of over 5 percent, it may be more beneficial to shift funds to these accounts instead.
Mari Adam, a certified financial planner, suggests shopping around for the best deal on savings accounts. By switching from an account with a rate just above zero percent to one with a yield of over 5 percent, homeowners can potentially earn hundreds or even thousands of dollars per year in interest. Websites like DepositAccounts.com can be useful resources for comparing rates and finding the best options.
In conclusion, homeowners need to be aware of the potential hazards associated with borrowing against their homes, especially if they have a variable-rate HELOC. As interest rates rise, loan payments can become more burdensome, potentially causing financial strain. It is crucial for borrowers to stay informed, communicate with their lenders, and consider alternative strategies for managing their finances. By taking proactive steps, homeowners can navigate potential challenges and ensure their financial well-being.
