Homeowners across the United States are currently sitting on $17 trillion in equity, as reported by CoreLogic. This means that the average homeowner gained $28,000 in equity compared to the previous year. According to Greg McBride, chief financial analyst at Bankrate, home equity is not like bread – it won’t go stale if it just sits there.
While it is generally advisable not to touch the equity in your home, there are certain situations where tapping into it can be a viable solution. According to experts, making major home improvements or repairs is a good reason to consider using your home equity. In fact, a survey by Bankrate found that 55% of polled homeowners see home improvements or repairs as a legitimate reason to tap into their home equity.
Using home equity to fund renovation projects or repairs is often a more cost-effective option compared to personal loans or credit cards. As of August 7, the average home equity loan interest rate is 8.59%, while the average HELOC interest rate is 9.37%. In comparison, the average personal loan interest rate is 12.38% and the average credit card interest rate stands at 24.92%.
Despite the lower interest rates associated with home equity loans, there are still risks involved. With the Federal Reserve increasing rates, borrowing against your home equity may become more expensive. It is important to have a clear plan in place to pay off the debt in a timely manner to avoid financial pitfalls.
Using home equity to invest in your home can make financial sense, according to Jessica Lautz, deputy chief economist at the National Association of Realtors. Projects that enhance the value of your home, such as new roofing or refinishing hardwood floors, can increase profits when you eventually sell the property. It is important to choose renovation projects that have universal appeal and can help maintain or boost the value of your home.
While it may be tempting to tap into your home equity for vacations or big-ticket items, experts advise against this move. Financing non-essential expenses like vacations or depreciating assets such as cars or electronics with home equity can lead to financial strain in the long run. It is crucial to be strategic and purposeful when considering using your home equity, prioritizing investments that will benefit your financial future.
Home equity can be a valuable financial resource if used wisely. While it may be tempting to tap into your equity for non-essential expenses, it is important to consider the long-term financial implications of borrowing against your home. By investing in projects that enhance the value of your home, you can make the most of your equity and secure your financial future.