Is Tapping Into Home Equity Worth It? What You Need to Know Before You Borrow
Home equity isn’t just sitting around like stale bread —it’s a financial resource that, if used wisely, can be a game changer. But is it always a good idea to tap into it? Here’s the lowdown on when to consider using your home equity and when to steer clear.
1. Home Improvements: The Smart Way to Use Home Equity
Home equity is a powerful tool when it comes to major home renovations and repairs. According to a Bankrate survey, 55% of homeowners find using home equity for home improvements a smart move. Whether you’re looking to update your kitchen, replace a roof, or install new flooring, leveraging your home equity can be more cost-effective compared to personal loans or credit cards.
Tip: Home equity loans often have lower interest rates than personal loans or credit cards, making them a cheaper borrowing option. Just be sure to have a solid repayment plan in place to avoid any surprises.
2. Higher Interest Rates: Proceed with Caution
Interest rates for home equity loans and HELOCs have risen, so it’s crucial to weigh the costs carefully. As of August 7, 2024, the average home equity loan interest rate is 8.59%, while HELOCs average 9.37%. This is significantly lower than personal loan rates (12.38%) and credit card rates (24.92%).
Tip: Calculate the total cost of borrowing before committing. If the rates seem high, it might be worth exploring other financing options or waiting until rates are more favorable.
3. Boosting Home Value: A Wise Investment
Investing in your home with the help of home equity can potentially increase its market value. Projects like new roofing and refinishing hardwood floors not only preserve your home but can also offer substantial returns. According to the National Association of Realtors, refinishing hardwood floors can recoup 147% of the cost, while new roofing can recover 100% of its expense.
Tip: Prioritize renovations that have the highest return on investment to maximize your home’s value. Focus on projects that enhance both functionality and aesthetic appeal.
4. Avoid Tapping Equity for Depreciating Assets
Using home equity to finance vacations or big-ticket items, like cars or electronics, is generally a bad idea. These are depreciating assets that lose value over time, making them poor candidates for home equity funding. As Greg McBride of Bankrate puts it, “If you have to finance the cost of your vacation, you can’t afford the vacation.”
Tip: Save for non-essential expenses through a separate savings plan rather than using home equity. This ensures you’re not stretching your finances too thin.
5. Consider Alternative Funding Methods
While home equity can be a useful tool, it’s not always the best option. The 2024 U.S. Houzz & Home Study reveals that 83% of homeowners fund renovations with cash savings. With credit card usage for renovations also on the rise, it’s essential to explore all financing options.
Tip: Evaluate all funding avenues, including savings and low-interest credit cards, before deciding to tap into your home equity. Diversifying your funding sources can help manage costs more effectively.
Conclusion
Tapping into your home equity can be a powerful financial strategy, particularly for home improvements that boost your property's value. However, it’s essential to approach it with caution, given the current higher interest rates and the potential risks involved. By prioritizing high-return investments and avoiding unnecessary expenditures, you can make the most of your home equity without overextending yourself.
If you or anyone you know needs guidance on how to navigate home equity or real estate decisions, I’m here to help. Feel free to reach out or refer friends and family who might benefit from expert advice!
Want to discuss how to leverage your home equity for the best results? Contact me today at www.RealvolutionHomes.com and let’s make your real estate goals a reality!
Source: CNBC
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Dan McDevitt
Cummings & Company Realtors
Team Leader Realvolution Homes Group
