Buying a Home and HELOCs
Being a SmartVestor Pro, and a general adviser to people around me, I have received a few questions over the last six months about buying a home. The other question I have received over that time is, “My house is paid off, but I have other debt; should I do a home equity line of credit?” We will discuss both below.
Interest Rates & What it Means
A lot of the news lately has been talking about rising interest rates. The federal reserve sets this rate, and the interest rate is the number in which banks and credit unions borrow and lend to each other. Of course, the banks and credit unions do not take on this interest rate themselves; they pass it along to the consumer.
A year ago today, the average mortgage rate was 3.263%. For those who don’t understand what that means, that number represents the interest on top of the principal you still owe on your home. At this time last year, many people were still refinancing their homes, which means they captured the current interest rate by using the equity in their homes.
This background is essential in understanding because interest rates today are nowhere near that. As of February 10, 2023, the interest rate is 6.61% - more than double a year ago.
Buying a Home
So, what does this mean? If you are looking to buy a home in the next year or so and it is not an immediate need, waiting until you hear that interest rates are lower or have fallen might be a good idea. This would likely keep you from spending hundreds of dollars extra per month. If you can help it, wait this out.
On the other hand, there is an argument not to wait to buy a home. This argument is: you bite the bullet, pay the higher interest rate for as long as it takes for interest rates to come down, and refinance the home with the equity you’ve built, as I mentioned earlier. But this is all personal preference, and you should consult your financial professional before making this decision.
Home Equity Line of Credit
Lastly, a home equity line of credit (HELOC) allows you to take a certain amount of money from the equity you’ve built in your home and take on current interest rates to repay the home equity line of credit.
Using a HELOC to pay off other debt can be tempting, but we, like Dave Ramsey, do not recommend doing this. This is because of a couple of reasons:
If you default or misstep in any way on the HELOC, you could be putting your home at risk.
When you consolidate debt, it tends to ‘feel’ like you did something about the debt when, in fact, you still have the debt and need to pay it off with gazelle intensity!
In conclusion, knowing how this all works is important because sometimes people hear about interest rates but don’t fully know how it impacts things when it comes to buying a home or using the equity in your home.
The power of speaking with your advisor
As mentioned above, if you are considering buying a home and are trying to figure out what is right for you financially, I would be more than happy to help, as would any of the other Financial Advisors on our team. If you are looking for a way to pay down your debt, contact our Financial Coaches.
Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.
Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.
Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.