Homeowners today are sitting on an impressive $17 trillion in equity, marking an average gain of $28,000 compared to the previous year. This equity represents a valuable asset that can be tapped into for various financial needs, making it a significant source of wealth for many individuals. Despite the substantial value it holds, experts like Greg McBride caution that home equity is not something that needs to be accessed immediately. As McBride aptly put it, “It won’t go stale if it just sits there.”
While leaving home equity untouched is generally recommended, there are situations where accessing it can be a smart financial move. One such scenario is for major home improvements or repairs. Experts suggest that utilizing home equity for these purposes can be a cost-effective solution, compared to personal loans or credit cards. According to a recent survey by Bankrate, 55% of polled homeowners view home improvements as a valid reason to tap into their home equity.
As of the latest data, the average interest rates for home equity loans and HELOCs stand at 8.59% and 9.37%, respectively. In contrast, personal loans and credit cards carry substantially higher interest rates, at 12.38% and 24.92%, respectively. While the lower rates of home equity loans make them an attractive borrowing option, it is essential to approach this method of financing with caution. With recent rate hikes by the Federal Reserve, the costs associated with tapping into home equity have increased, necessitating a strategic repayment plan to avoid financial pitfalls.
Jessica Lautz, from the National Association of Realtors, emphasizes the value of using home equity to invest in your property. Renovation projects can not only enhance the aesthetic appeal of your home but also boost its overall value. Certain projects, such as new roofing or refinishing hardwood floors, have shown to have a high percentage cost recovery, according to the latest Remodeling Impact Report by NAR. These improvements not only contribute to your current living situation but can also increase the resale value of your home in the future.
While home equity can be a powerful financial tool, experts warn against misusing it for frivolous expenses. Using home equity to fund vacations or purchase depreciating assets, like cars or electronics, is strongly discouraged. McBride points out that financing expenses like vacations indicates that you may be overspending, and utilizing home equity for items that lose value over time is a risky financial decision. It is important to approach the use of home equity with a long-term financial strategy in mind to avoid getting into unnecessary debt.
Home equity represents a significant source of wealth that many homeowners possess. When used wisely, tapping into home equity can be a strategic financial move, especially for home improvements or repairs that add value to your property. However, it is crucial to understand the costs associated with borrowing against your home’s equity and to have a well-thought-out plan for repayment. By leveraging home equity responsibly, you can unlock the full financial potential of your property while securing your financial future.