Homeowners are currently sitting on a whopping $17 trillion in equity, and the average homeowner has gained $28,000 in equity compared to a year earlier. This presents a significant financial opportunity for homeowners who are looking to make major home improvements or repairs. According to a survey by Bankrate, 55% of polled homeowners believe that utilizing home equity for home improvements is a good reason to tap into this resource.
Utilizing home equity can be a cost-effective borrowing option, especially when compared to personal loans or credit cards. The average interest rate for a home equity loan is 8.59%, while a home equity line of credit (HELOC) has an average interest rate of 9.37%. In contrast, the average interest rate for a personal loan is 12.38%, and credit cards have an average interest rate of 24.92%. This makes tapping into home equity a more attractive option for financing renovation projects.
Risks of Tapping into Home Equity
While tapping into home equity can be beneficial, it also comes with its own set of risks. With the Federal Reserve’s recent rate hikes, interest rates on home equity loans and HELOCs have increased. This means that borrowers need to have a solid plan in place to pay off the debt in order to avoid financial hardship down the line.
One common mistake that homeowners make is using home equity to finance vacations or big-ticket items like cars or electronics. According to experts, this is not a wise financial decision. Financing a vacation or a depreciating asset with home equity can put homeowners in a precarious financial position, as they are essentially borrowing against the value of their home for assets that do not hold their value over time.
Investing in Your Home
Using home equity to invest in your home can be a smart move, according to Jessica Lautz, deputy chief economist at the National Association of Realtors. Projects like new roofing, refinishing hardwood floors, or installing new wood flooring can not only preserve the house but also enhance its overall value. In fact, the latest Remodeling Impact Report found that certain projects like refinishing hardwood floors can yield a cost recovery of up to 147%, making them a valuable investment for homeowners.
However, it is important for homeowners to approach home equity investments with caution and to prioritize projects that have a high return on investment. Making thoughtful and strategic improvements to your home can increase its resale value and ultimately lead to higher profits when you decide to sell.
Tapping into home equity can be a useful financial tool for homeowners who are looking to make substantial improvements to their homes. While the low interest rates and potential for increased property value are attractive benefits, it is crucial for homeowners to approach this process with careful consideration and to avoid using home equity for non-essential or depreciating expenses. By utilizing home equity responsibly and investing in strategic home improvement projects, homeowners can maximize their financial potential and make the most of their home’s equity.