2 borrowers who should open a home equity loan now (and 2 who shouldn't)

A home equity loan can be a powerful borrowing tool in any economic climate, but especially so now. With inflation still an issue for many Americans, even if it's significantly cooled, and higher interest rates making borrowing expensive on a variety of products, home equity loans offer a viable alternative to make ends meet. Rates on home equity loans are lower than those on personal loans and credit cards. And, if used for eligible home repairs and renovations, the interest paid on a home equity loan may be tax-deductible.

Still, a home equity loan isn't a one-size-fits-all solution, particularly in today's unique economy. And, like all borrowing products, it will need to be approached strategically. To that end, it helps to know which types of borrowers should consider opening a home equity loan now … and which may be better served by exploring alternatives. Below, we'll break down these borrowers into two categories worth knowing.

Start by seeing what home equity loan rate you could qualify for here.

Borrowers should open a home equity loan now

Here are two types of homeowners who may benefit from opening a home equity loan now:

Borrowers who have seen their home value spike

A surge in home prices in recent years may not have been welcomed by homebuyers, but it was a major boost for homeowners. With the average home equity level over $313,000 now – a figure that's up 6% year-over-year – homeowners have a healthy portion of home equity to borrow from now. 

If you're one of the homeowners who have seen your home value increase and are confident that it will remain high or could increase further in the years to come, then it could make sense to leverage that equity via a home equity loan. This is especially true if you're planning to use the funds to finance income-producing opportunities or want to use it to consolidate high-interest debt. In these circumstances, a home equity loan could be your optimal way to do so.

Get started with a home equity loan online now.

Borrowers who can't afford any volatility

If you need to borrow from your home equity now, your ability to weather any volatility in the future is likely low. Unfortunately, that's what you'll run into with a variable-rate home equity line of credit (HELOC), which will see rate changes monthly for borrowers during their repayment period. 

A home equity loan, on the other hand, has a fixed rate that will remain the same unless refinanced, injecting some much-needed predictability into your budget, and allowing you to focus on other, more pressing financial concerns. Plus, home equity loan rates have been steadily declining for more than a year now, making them much more affordable than they were a few years ago.

Borrowers who shouldn't open a home equity loan now

And here are two types of borrowers who may want to explore other options besides a home equity loan now:

Borrowers who can't manage their current budget

If you're already struggling to manage your current budget, the need for a home equity loan becomes understandable. But it won't likely be the solution you need and is likely to compound your financial woes – not alleviate them. If you can't manage your budget adequately now, and take on a home equity loan on top of it, you could risk losing your home to the lender altogether as they can repossess it if you fail to make your repayments on time. 

That's a risk always worth avoiding, particularly for homeowners already struggling to stay afloat financially. In these circumstances, it may be worth exploring the root causes of your current financial situation and, possibly, considering debt relief options instead.

Borrowers whose credit has been damaged

With inflation spiking to a decades-high in June 2022, interest rates hitting a 22-year high and even mortgage rates hitting their highest level since 2000, there's a good chance that your credit score has dipped in recent years, perhaps to a significant degree. If that's the case, and you haven't yet recovered, borrowing more money from your home isn't a good idea now. Even with a fixed interest rate, it won't be beneficial for your situation if your credit score leads to a rate offer that's simply unaffordable. 

Borrowing should generally only be done when you have a high credit score and clean credit history but this is especially true when accessing your home equity via a loan. So if you don't think your credit is good enough to get an affordable rate, alternative borrowing options or financial strategies should take precedence, especially considering the additional work that needs to be done to reduce today's inflation and make everyday living more affordable.

The bottom line

A home equity loan could be the financial solution you need in today's unique economy … or it could further cause your financial health to worsen. So it's worth realistically evaluating your financial needs to better determine which of the above classifications describe your situation. By doing so, you can start the work toward improving your finances, whether that be by opening a home equity loan now or by exploring other options.