Why you should get a home equity loan when prices are high

The interest rate environment in the U.S. has not been particularly favorable in recent months. And with the Federal Reserve expected to raise interest rates again this week, the potential for relief looks dim. 

While interest rate hikes have hurt homebuyers and current owners looking to refinance, their influence on home values has varied. Some home values have since dropped from where they were in 2020 and 2021, while others have stayed steady or even increased. In January 2023, home prices jumped 3.8% from where they were 12 months earlier. In February, values jumped in 40 major U.S. cities, CBS News reported.

If you're a homeowner in one of those cities - or just an owner who has seen a spike in their home value lately - then a home equity loan could be worth exploring.

You can start by checking rates and eligibility terms here now.

Why you should get a home equity loan when prices are high

Simply put: The more equity you have accumulated in your home, the more you can withdraw. Lenders typically let homeowners borrow 80% to 85% of their home's equity to use as they see fit. So if your home has risen in value lately, there may be a substantial amount of cash to work with. That's because home equity isn't just built by the amount of payments you've made toward your mortgage. It also takes into account the current value of your home.

For example, let's say your initial mortgage amount was $400,000. You've since made $100,000 worth of payments toward the principal, leaving you with an outstanding balance of $300,000. While you were making those payments, your home has increased in value to $500,000. In this scenario, you would have $200,000 (payments + home value increase) of home equity to work with. 

So, even if you've just been making your monthly mortgage payments as usual, you may have substantially more equity to deduct than you would have just a few years ago. Check your home equity loan options here now to see how much you could withdraw.

Benefits of a home equity loan

A home equity loan has multiple advantages for homeowners. Here are two major ones:

It may be tax-deductible

If used for IRS-approved reasons, the interest on home equity loans could be deducted from your taxes at the end of the year.

"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.

"Generally, you can deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a," the IRS says. "However, any interest showing in box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by the property, is not deductible if the proceeds were not used to buy, build, or substantially improve a qualified home."

It has lower interest rates

If you need credit to pay for rising expenses and are considering a credit card or personal loan, you should also consider a home equity loan or home equity line of credit (HELOC). Both of these credit types come with significantly lower interest rates than credit cards (which are around 20%) and personal loans (around 10%). Depending on your personal credit history and other factors, you could get a home equity loan for around 8% or lower. 

Just be sure to shop around for lenders and rates before signing on the dotted line (and, no, you don't need to use your current mortgage lender to get a home equity loan). Check out your home equity loan options here now to learn more.

The bottom line

In today's inflationary environment, Americans must be judicious about which forms of credit are worthwhile and which they're better off skipping. For homeowners who have seen a spike in their homes' values, a home equity loan could prove a worthy alternative. These types of loans allow the homeowner to access approximately 80% of their home's worth, which in many cases could equate to hundreds of thousands of dollars. 

But a home equity loan isn't just worth it when prices are high. It's also advantageous because, if used correctly, the interest can be deducted from your taxes. And it has lower interest rates than some other, more popular forms of credit, making it especially attractive for those who need an extra boost in today's economy.