What home equity borrowers should think about before applying now
Borrowing from your home equity can be a smart and cost-effective decision for many homeowners, particularly in today's unique economic climate. With interest rates on alternatives like credit cards and personal loans much higher than what they are on home equity loans and home equity lines of credit (HELOCs), your monthly payments are likely to be much more manageable. With the average homeowner in possession of close to $330,000 worth of equity now, as well, this is likely the only way to access a six-figure sum of money at a reasonable rate.
Still, today's economy hasn't completely recovered from the inflationary period it endured in recent years. While interest rates have been cut again, inflation ticked up in October and any number of economic factors could quickly reshuffle the borrowing landscape. Understanding this potential, then, home equity borrowers should think through a few possibilities before signing their application. Below, we'll break down three of these timely considerations.
See how much home equity you could potentially borrow here.
What home equity borrowers should think about before applying now
While the decision to borrow from your most important financial asset requires an in-depth and personal approach, it helps to know which specific considerations to account for now. Here are three wide-reaching ones:
The potential for rates to fall again
Hope was high that interest rates on home equity products would steadily decline after the Federal Reserve cut its federal funds rate in September and again in November. And while rates on both HELOCs and home equity loans have declined for much of 2024, there's no guarantee that they will continue to do so in December and into 2025. A complex series of factors drive home equity rates, so waiting for a lower, ideal rate to materialize may be a mistake. Instead, consider securing a lower home equity loan rate now (you could always refinance it to a lower one in the future).
See how low of a home equity loan rate you could lock in now.
Their intention for the funds
If you know you want to use your home equity for home repairs and renovations then it makes sense to apply for the financing – and to start using it – now, before 2025. If your projects qualify, you may be able to deduct the interest paid on home equity loans or HELOCs when you file your taxes in 2025. This makes the interest rate on both products less of a pressing concern. However, if you're planning to use it for other reasons that may not come with the same tax advantages, waiting for a cooler rate climate may be more beneficial. Only you will know the answer to this question.
Their future home value
Home prices are likely to continue to rise in many parts of the country in 2025. But, in others, they may stagnate or even drop. This could be a major concern for those who have leveraged their home by borrowing from its equity. So, first, do your best to understand the local real estate dynamics and your future home value. If all signs point to a price rise, you're likely safe. But if it's harder to predict, borrowing from your home ahead of a price drop could quickly lead to being underwater, financially. Weigh this scenario carefully before applying.
The bottom line
Both home equity loans and HELOCs can provide homeowners the funds they need at a cost they can afford. But borrowing from your home equity can be risky, too, if the above timely considerations aren't accounted for in advance. By contemplating these factors now, before an application, prospective borrowers can better determine if it's worth acting promptly or if they're better served by waiting for a more opportune time in 2025.
Have more home equity concerns? Learn more about your options here.
