After a long stretch of very low interest rates, the rates on mortgages and home equity loans are creeping up. If you need cash for a major home remodeling project or other expense, you may be worried about the rates on home equity loans and cash-out refinance mortgages. But which option has lower rates?
Home equity loans are usually more expensive than mortgages, but they may have more fees. Your cost will depend on the lender, your creditworthiness, and desired loan term.
- Home equity loans are usually more expensive than mortgages.
- As of April 28, 2022, the average annual percentage rate (APR) for a 30-year fixed-rate mortgage was 5.47%.
- The average rate for a home equity loan is 5.76%.
- Loans without closing costs are available, but lenders charge higher interest rates on those loans.
What Is a Mortgage?
Mortgages are specific types of loans used to purchase property. With a conventional mortgage, you borrow a sum of cash to buy a house. The amount you borrow is based on the value of the home minus your down payment.
However, a cash-out refinance mortgage is a tool you can use to get a large amount of cash. You take out a new mortgage for more than you owe on the existing one, and you get the difference to use for your expenses or projects.
What Is a Home Equity Loan?
A home equity loan is for current homeowners that have accumulated equity in their property, meaning it’s worth more than they owe on their current mortgage. In general, lenders require you to have built up at least 20% of loan equity to qualify for a loan.
How Do Home Equity Loans Differ From Mortgages?
Both home equity loans and cash-out refinance loans use your home as collateral. But there are some major differences to keep in mind:
- Terms: A cash-out refinance loan is a type of mortgage. Like conventional mortgages, they usually have terms of 15 or 30 years.
- Closing Costs: Although home equity loans tend to be more expensive than mortgages, they usually have lower closing costs.
- APR: Home equity loans usually have fixed interest rates. Cash-out refinance loans, like other mortgages, can be fixed or adjustable rate mortgages.
Typical Rates for Home Equity Loans and Mortgages
When it comes to rates, home equity loans and cash-out refinance mortgages can differ significantly. The rates on home equity loans tend to be higher than those for cash-out refinance mortgages.
As of April 28, 2022, the average rate for a 30-year fixed-rate mortgage was 5.47%, while the average rate for a home equity loan was 5.76%.
If you can afford the payments on a shorter loan term, consider a 15-year mortgage. They have substantially lower rates than 30-year mortgages. As of April 28, 2022, the average rate on a 15-year mortgage was 4.77%.
Home Equity Loans vs. Mortgages: Which Is Right for You?
Now that you know the typical interest rates for home equity loans and mortgages, you can think about which loan option makes the most sense for you. If you’re still not sure, ask yourself the following three questions:
Do I Have Cash for Closing Costs?
Although home equity loans have higher rates than mortgages, they usually have lower fees. That’s because you have to pay closing costs as a percentage of the entire loan amount.
For a home equity loan, you can choose exactly how much money you want to borrow and pay closing costs only on that amount. But with a cash-out refinance loan, you have to pay closing costs on the entire loan: the amount that covers your current mortgage and the additional sum you’re adding to it.
If you don’t have the cash handy in savings, you may be better off with a home equity loan or finding a lender that allows you to roll closing costs into the loan.
How Much Money Do I Need?
Think about how much money you need. If you’re planning home renovations or a vacation, create a budget—and add some wiggle room to give yourself some cushion.
The amount—and the available equity in your home—will help determine which loan option is right for you. Cash-out refinance loans can typically get you more money than home equity loans.
Does My Existing Loan Have a Low Rate?
Depending on when you took out your current mortgage, you may have a rate that is substantially lower than the rates available today. If that’s the case, utilizing a cash-out refinance loan may not make sense; you’d move your loan to a higher rate and pay that rate on a larger loan balance.
Instead, using a home equity loan—and leaving your existing mortgage in its current state—may lower your overall repayment cost.
Are Mortgage Rates Rising Now?
While mortgage rates are higher right now than they were a few months ago, they are nowhere near the historical high. In the 1980s, mortgage rates were as high as 18%.
What If My Cash Needs Are Unpredictable?
How Can I Build Equity in My Home?
Home equity rises based on two factors: the mortgage being paid down and the property value increasing. Paying off your mortgage more quickly—by making larger payments or extra payments, or both—can build up equity. If you want to increase the value of your property, consider remodeling or making some home improvements.
The Bottom Line
Mortgages can have lower interest rates than home equity loans, but that doesn’t mean they’re always a better choice. When deciding which loan type is best for you, consider your goals, credit, and current loan terms. Keep in mind that the rates for home equity loans and mortgages are always changing, so it’s important to shop around with multiple lenders to find the latest rates.