Is your home price still high? Here's why you should use your equity now
The Federal Reserve raised interest rates earlier this month, its tenth such action since March 2022. The move to bump rates to a range between 5% and 5.25% again pushes the prospect of homebuying and refinancing out of the picture for many people. But while the rate environment may not be favorable for either of those actions, it can motivate owners to make another move instead.
By using the home equity they've accumulated via a home equity loan or home equity line of credit (HELOC), homeowners can pay for home repairs, renovations or other major expenses, often at a lower interest rate than other available credit options. Like most other financial products and services, there are better times to use home equity than others. But with the Fed's latest rate bump, now is a great time to act.
Explore your home equity options here to learn more.
Why you should use your home equity now
Home prices have been high in recent years, particularly when interest rates were low. But as rates continually creep up, the longer-term forecast for home values isn't as clear.
Data in recent months has been uneven. Home prices have been dropping in the West but growing in the East, CBS News recently reported. Specifically, home prices fell in 12 large metros west of Texas but grew in 40 major cities west of Colorado. That comes after the news that overall home values dropped $2.3 trillion between June and December 2022.
If you're an owner who has seen their home value stay consistent (or increase), the latest Fed action may motivate you to tap into your home equity now. That's because, for owners who want to sell in today's high-rate environment, the price of their home will likely drop. That decrease will affect homeowners across the board, ultimately leading to a reduction in the amount of home equity you have to work with. If you were ultimately planning on using your equity to renovate your kitchen or replace your roof, now is the time to do so.
Home equity isn't just calculated by how much you've paid toward your mortgage principle. It also incorporates the overall value of your home at the time of the application. So if your home is currently appraised for a high amount, it may make sense to be aggressive before the trickle-down effect of the Fed's rate boost hurts your home value.
Learn more about your home equity options here.
Home equity benefits to know
Both home equity loans and HELOCs have unique advantages homeowners should know. Here are two major ones:
Lower interest rates
Home equity loans and HELOCs both have lower interest rates than personal loans and credit cards, assuming your credit score is relatively high and your credit history is clean. Just understand that interest rates for home equity loans are typically locked in, while HELOC rates are adjustable.
Tax deductions
If you use a home equity loan or HELOC to make IRS-approved home repairs, you may be eligible to deduct the interest you paid on the credit when it comes time to file your taxes.
"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS explains online. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
The bottom line
No one knows with certainty where the real estate market is heading. But interest rates are exponentially higher than they were at the height of the pandemic, and that's bound to have consequences. For homeowners enjoying significant amounts of equity - but who still need cash for major expenses - now may be the best time to act before the rate environment catches up to home values. Two smart ways to do this are via a home equity loan or a HELOC.
Have more questions? Not sure which is right for you? Explore your home equity options here now to learn more.
