When Are Home Equity Loan Rates Worth It?

With all of the promotions that are thrown around dealing with home equity loan rates there is a good chance that you are being enticed to obtain one right now. Lenders are always putting out some kind of promotion in hopes of getting new customers in the door. With so many different deals thrown around it is hard to know when the best time to get a home equity loan really is. Home equity loan rates change all the time and you need to know when the right time to get a home equity loan is. 

Compare to Other Interest Rates

Most of the time when you use a home equity loan, it is to purchase some other type of commodity. This means that you are typically purchasing something that would ordinarily require you to get a different type of loan for. For example, many people use home equity loans to purchase cars with. If you are purchasing a car, many times the rate on an auto loan is going to be higher than the prevailing rate for home equity loans is. If you have a quote on a rate for a home equity loan, you should compare it against the type of loan that you are considering and see which one is lower. 

Another common thing people use home equity loans for is to finance education. This is one that may not be in your best interest because student loans typically have lower rates than home equity loans do. 

Compare Terms

Besides the interest rate on the types of loans that you are comparing, you also have to compare terms. Sometimes there are other factors involved besides purely the interest rate. For example, let's say that you are getting ready to do a home remodel. You need to buy new flooring, new cabinets, some drywall, and other building materials. You do some estimates and find out that you are going to need about $30,000 to cover the cost of everything. 

If you are shopping at a retail store for all of this, they will probably offer some sort of in-store financing. A popular term is "no interest no payments for 12 months." This might sound enticing to you because you do not have to pay interest on the money that you borrow. However, compared to a home equity loan, it is most likely not in your best interest. 

First of all, you only get 12 months to pay off the entire balance. If you do not pay off the balance, you will be hit with accrued interest at over 20% in most cases. With a home equity loan, you typically have as much as 10 years to pay off the loan and you have a fixed payment over the life of the loan. By the time you add in the tax advantages of using home equity funds, the home equity loan is usually a much better option than other types of financing. 

 

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