Why you should use your home equity before home prices drop
Have you been considering the idea of tapping into your home equity? Well, now may be the time to do it. Home values nationwide have steadily increased over the last decade, and in turn, many homeowners are sitting on significant amounts of equity. But, this may not be the case for much longer.
Both economists and housing experts alike expect housing prices to decline by about 1.6% in 2023, according to a recent Zillow Home Price Expectation survey of economists and housing experts. If that happens, your equity could take a hit, leaving you with less money to borrow from when you need it. With this in mind, here's why you might want to use your home equity now before your home's value goes down.
Start by exploring your home equity options here now.
Why you should use your home equity before prices drop
Lenders typically allow you to borrow 80% to 85% of your home equity, though some may allow you to borrow as much as 90% in some cases. The amount of equity you have in your home is calculated by subtracting your outstanding mortgage balance from your home's current market value.
For example, let's say your starting mortgage balance was $400,000. Over time, you've made $100,000 in mortgage payments, bringing the balance down to $300,000. Meanwhile, your home has appreciated to $500,000. That means your home equity would be $200,000 ($500,000 minus $300,000).
Now, let's say you decide to wait several years to pull from your equity. In that time, your home value drops from $500,000 to $450,000. Your home equity in this case is only $150,000 ($450,000 minus $300,000).
In other words, when home prices drop, you have less equity to pull from. If you've been thinking of pulling the trigger on a home equity loan or HELOC, you'll get more from your equity by doing so before home values decrease.
Check out current home equity rates to find out how much you might be able to borrow.
Other considerations
In addition to getting the most equity out of your home, you can also maximize the ROI you get from it. One of the best ways to use home equity funds is to make home improvements. If you use your funds for IRS-approved repairs and improvements, you may be able to deduct the interest.
"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 says. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
Plus, these improvements can increase your home's value, allowing you to sell it for more in the future, whatever the housing market looks like.
The bottom line
Your home equity can be an excellent way to finance a major purchase or build wealth for the future. Taking advantage of this equity when home values are high can help you get more money than you might be able to in the near future. With home prices expected to fall over the second half of the year, now is the perfect time to look into your home equity options.
Ready to get a home equity loan or HELOC? Start by reviewing your options here.
