As of the end of the first quarter of 2024, homeowners collectively hold $17 trillion in equity, with the average homeowner gaining $28,000 compared to the previous year. While this may seem like a substantial amount of money, it is essential to make wise decisions when it comes to tapping into this equity. Home equity, unlike bread, doesn’t go stale if left untouched, as noted by Greg McBride, chief financial analyst at Bankrate.
One of the most appropriate reasons to tap into your home equity is to fund major home improvements or repairs. According to experts, using home equity for renovations is a cost-effective borrowing option compared to personal loans or credit cards. As of August 7, the average interest rates for home equity loans and HELOCs stand at 8.59% and 9.37%, respectively, which is significantly lower than the average personal loan interest rate of 12.38% and credit card interest rate of 24.92%.
While leveraging home equity can be beneficial, it does come with risks, especially in a rising interest rate environment. With the Federal Reserve increasing rates, homeowners need to have a plan in place to pay off the debt effectively. However, investing in home improvement projects can add value to your property, ultimately leading to higher profits when selling. According to the National Association of Realtors, investing in projects like new roofing or refinishing hardwood floors can yield a high cost recovery percentage.
While it may be tempting to tap into your home equity for vacations or big-ticket items, experts caution against this. Financing items that depreciate in value, such as vacations, cars, or electronics, with home equity is not a prudent financial move. According to McBride, if you need to finance your vacation, you probably can’t afford it in the first place. It’s better to use your home equity for investments that will increase the value of your property in the long run.
While home equity can be a valuable source of funding for necessary home improvements, it is crucial to use it wisely. By making informed decisions and considering the long-term benefits of investing in your property, you can maximize the potential of your home equity without putting yourself at unnecessary financial risk. Remember, home equity is a valuable asset that should be utilized thoughtfully for lasting financial stability.