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The alarming levels of consumer debt, the steady appreciation of real estate values and falling rates on home equity loans are just the recipe for many consumers to consolidate high-interest debt into a lower-rate home equity loan.
The trade-off for the lower rates, affordable payments and tax deductibility is securing the loan with the equity in your home. While this raises the consequences of default, the benefits to debt reduction are worth noting.
But which loan to take: a fixed-rate home equity loan or a variable-rate home equity line of credit (HELOC)?
Weekly National Index pegs the average home equity loan rate at 9.18 percent, the lowest since August 1999. The average HELOC rate is even better at 7.88 percent, the lowest in nearly seven years.
The plummet in HELOC rates is not surprising. It's commonly linked to the prime rate, and given that the prevalent benchmark -- the prime rate -- is now at 7.5 percent, the lowest in seven years, as well.
If you exclude introductory specials on HELOCs, institutions offering both a variable-rate HELOC and a fixed-rate home equity loan are twice as likely to offer a better rate on HELOCs.
What's more, if the Federal Reserve Board cuts interest rates further, that will bring HELOC rates even lower, to the benefit of existing HELOC borrowers, but not existing fixed-rate borrowers. Potential borrowers have the luxury of being able to sleep on it, without missing out on great rates, unlike those mulling a mortgage refinancing.
So far, the advantage clearly points to a HELOC. But while variable rates are beneficial in a declining interest rate environment, the exact opposite is true when rates are rising.
Before discounting that possibility entirely, consider the reversal seen since 12 months ago -- when the economy was at the tail end of six measured rate hikes aimed to keep inflation at bay.
Those desiring a fixed monthly payment over the long haul should look to the stability of a fixed-rate home equity loan.
However, the variable rate HELOC does provide many benefits both short and long-term: attractive rates, the frequency of introductory rates and the ability to benefit as rates continue to decline.
Unsure? No need to rush, this opportunity will keep knocking.
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