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March 6, 2017

Interest Rates Are Rising – Should You Get Your Home Equity Loan Now?

Across the board and around the globe, central banks are being urged by leading economists to raise interest rates to avoid another popping of the bubble which is building at a significant rate due to artificially low rates. As history shows, low interest rates which were artificially set in 2000 and 2007 precipitated the ‘crash’ that set the United States in a recession that was a hair’s breadth away from a full-blown depression. In fact, it was so very close that this period in time became known as ‘The Great Recession.’ 

While governments around the world are trying to keep interest rates low for taxpayers who are just now working their way back to solvency, it might work against those very same people who are trying to swim above water. If rates stay low for much longer, many economists warn that another even greater Great Recession is in the wings. With New Jersey having the highest property taxes in the nation and with the average price of a home at almost ¾ of a million dollars, it might be time for homeowners in the Garden State to look at current home equity loan rates in NJ if there is any possibility that a loan may be needed in the short term.

Capitalize on the Equity in Your Home 

If you’ve been paying on your mortgage loan for a number of years, it might be in your best interest to get that home equity loan now because you will most likely be getting a better rate than later in the year, even. There is no telling when the Feds will, if at all, raise rates so it is better to be prepared. If you want to add improvements to your home, save money for a potential recession or perhaps have money on hand for your kids’ college in a couple years, this might be the time to capitalize on the equity you’ve built in your home. Unlike a home improvement loan, an equity loan is based on the value of your home above and beyond what you currently owe on a mortgage, so it is yours to use as you please in most cases.

Rates Are Already Rising

In the week just following the presidential election last fall, interest rates on home mortgage loans jumped to 3.95% up from 3.77% on any home loans with a value below $417,000. This was information released by the Mortgage Bankers Association, the MBA, and an average of rates around the nation based on the Federal Reserve rate. Bear in mind that you will find various rates from bank to bank and even state to state at the same bank because of market variables from location to location.

The rate quoted above was on a 30 year fixed rate loan. According to bankrate.com, mortgage rates are still much, much lower than they were just three decades ago when a 30 year fixed rate mortgage was over 12% interest. With the current interest rate at less than 4%, that’s 1/3 the ‘cost’ of a loan in the latter part of the last century. Rates could rise that high, and higher yet, if central banks decide to begin raising rates to counteract inflation.

Will a Rush for Loans Cause a Crash? 

This is a question which many people are asking but, the answer isn’t as simple as you might expect. Actually, the crash of 2008 and 2009 wasn’t the result of low interest rates or even a great number of loans being out there. It was poor investment on the part of large financial institutions and an inability to repay loans on the borrower’s end. It was the compilation of a number of factors that led to the final event that sent shockwaves around the globe.

Some countries like Greece and some South American economies are still reeling from market conditions set in motion back then and there is no indication that their respective economies are even close to recovering. So then, the short answer is, no, a surge in home equity loans now at low rates shouldn’t cause a dip in the economy. It is only when financial institutions make poor judgment calls on where and how they invest money that the real problems begin.

What You Can Conclude 

The bottom line at this point in time is to think long and hard about whether or not you might need a nest egg going forward. It’s always nice to have some cash on hand and a 30 year fixed rate home equity loan might be the best solution. A variable rate loan follows market conditions and if the Feds raise the rates, your loan will cost more as well, going up and up over time. What you can conclude is that now just might be the time to get that home equity loan, hunker down, and watch the market before spending that money. It never hurts to be ready for a rainy day and if you read between the lines, the forecast is for a deluge.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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