The Best Way to Tap into Home Equity in a Rising Rate Environment

Interested in renovating a part of your home, purchasing a big-ticket item, or making a significant life change? If so, you may be mulling over how you’ll pay for it. If you’re a homeowner, tapping into your home’s equity may be the low-rate option you’ve been looking for. 

Equity is how much of your home you actually own. You can calculate this by subtracting the principal owed on your mortgage from the market value of the property. For example, if you still owe $50,000 on a house with a market value of $300,000, you have $250,000 in equity. 

Lenders offer lower rates on equity products because they are backed by an asset – the asset being your home. Because of this, it’s important to gauge your ability to make on-time payments. Along with this, you should familiarize yourself with each options’ features and benefits – as well as how today’s economy may affect which is best for you – before applying. 

Options to lock in

• Home equity line of credit (HELOC). A HELOC is a revolving line of credit that lets you borrow up to your credit limit several times as opposed to receiving a one-time lump sum. There’s a draw period – in which you can use the funds and make interest payments, like a credit card – and a repayment period. During the repayment period, you can no longer draw funds and must start paying back the principal plus interest.  
• Home equity loan. A home equity loan operates like a standard loan. You borrow a lump sum and make payments based on a schedule determined by your lender. Use an online home equity calculator to get started. 

Home equity in 2022

While the high demand and low inventory in the U.S. housing market is potentially bad news for homebuyers, it’s good news for current homeowners looking to leverage their equity. That’s because the demand drives up the market value of homes – and boosts home equity in tandem. 
But demand isn’t the only factor you’ll need to consider. Below are two items that may factor into your decision. 

Interest rates

The Fed has increased interest rates several times this year in an effort to combat soaring inflation. As a result, borrowing is getting more expensive – especially on variable-rate products. These include credit cards, adjustable-rate mortgages, and HELOCs. Because they have a variable rate, another rate hike from the Fed would increase your payment. On the flip side, the interest rate on home equity loans is fixed. A rate hike would not impact your payment. 

But economic conditions change. In 2021, the Fed lowered rates dramatically to lessen the economic fall out of the pandemic.¹ During this time, a variable-rate product was advantageous because it resulted in lower payments. Fixed-rate borrowers couldn’t reap the same benefits, but they enjoy long-term security and predictability. 

Flexibility 

The flexibility of drawing on a line of credit, paying it down, then drawing on it again is attractive. You can use the funds to take a vacation in July, add a fire pit to your backyard in the fall, then paint the interior of your house come winter. In addition, you are only paying on what you draw against your line. This, plus a competitive rate from the right financial institution, makes it an enticing option for many homeowners. 

Compare this to a fixed product, in which you are committing to a set dollar amount and repaying the full amount from day one. You may lose flexibility. During “uncertain” times of inflation and rising rates, the flexibility offered through a HELOC may help you feel more in control of your finances. 

Give this information some weight when choosing between a HELOC or a home equity loan. You don’t need to decide alone, either! A General Electric Credit Union (GECU) team member can help you determine the best home equity product based on your needs, goals, and risk tolerance. Use our online appointment scheduler so we can direct you to the right team member on your next in-branch visit. Then, go online once you’re ready to submit an application.