The latest data from CoreLogic reveals that homeowners in the United States are collectively sitting on a whopping $17 trillion in equity as of the end of the first quarter of 2024. This significant increase in homeowners’ equity represents a growth of $28,000 on average per homeowner compared to the previous year. While this substantial sum of money may be tempting to tap into for various reasons, financial experts caution against treating home equity like a readily available cash reserve.
According to Greg McBride, the chief financial analyst at Bankrate, home equity is not a perishable commodity like bread that goes stale if left untouched. While there are valid reasons to utilize home equity, such as funding major home improvements or repairs, it is essential to approach this option with caution. Experts suggest that tapping into home equity can be a cost-effective alternative to personal loans or credit cards for financing essential projects. However, it is crucial to consider the associated risks and have a clear repayment plan in place.
The Pros and Cons of Using Home Equity
As of August 7th, the current average interest rates for home equity loans and HELOCs stand at 8.59% and 9.37%, respectively, according to Bankrate. In comparison, personal loans carry an average interest rate of 12.38%, while credit cards have significantly higher rates at 24.92%. While cash savings remain the primary source of funding for renovation projects for most homeowners, there has been a noticeable uptick in credit card usage for such expenses, as reported by the 2024 U.S. Houzz & Home Study.
While using home equity can be a more affordable borrowing option, it is essential to weigh the potential risks. With the Federal Reserve’s recent rate hikes, interest rates on equity loans have increased, necessitating a careful approach to managing debt. Investing home equity in property improvements can add value to your home and potentially yield higher returns when selling. Projects like new roofing and refinishing hardwood floors have been shown to offer significant cost recovery, making them attractive options for homeowners looking to enhance their property’s appeal.
Despite the allure of tapping into home equity for non-essential expenses like vacations or big-ticket items, financial experts caution against such moves. McBride emphasizes that if you need to finance a vacation, it may be a sign that the trip is beyond your current financial means. Additionally, purchasing depreciating assets like cars or electronics with borrowed funds can lead to long-term financial strain. It is crucial to prioritize using home equity for essential investments that add value to your property rather than for discretionary spending.
Home equity can be a valuable financial resource for homeowners, providing a cost-effective means of funding essential projects. However, it is vital to approach this option judiciously, considering the associated risks and having a clear repayment plan in place. By making informed financial decisions and prioritizing investments that enhance your property’s value, you can leverage the power of home equity to secure your financial future.