Homeowners in the US are currently sitting on a record amount of home equity. The average homeowner has about $315,000 in equity, according to property data firm CoreLogic. Since the pandemic, when people were able to take advantage of rock-bottom mortgage rates, homeowners have benefited from a massive spike in housing values.
If you’re a homeowner sitting on a chunk of equity, now is a good time to leverage it. Equity can be pulled out through a home equity loan or home equity line of credit to pay for home renovations or consolidate debt, among other things. These are both considered second mortgages because, just like with the original mortgage, your home is used as collateral until you pay off the debt.
But what about that extra debt? Is it worth it now, when interest rates are so high? Won't borrowing rates be cheaper after the Federal Reserve reduces interest rates?
It all depends on your financial situation, what your goals are and how you intend to use your equity. Here’s how to decide whether you should take out a home equity loan or HELOC right now.
What’s going on with home equity rates?
Before you get a quote for a home equity loan or line of credit, know that interest rates are hovering around 8% to 12%. That's the bad news. The general consensus, however, is that those rates are likely to go lower over the next several months.
“The good news is we seem to be on a downward trajectory,” said Kevin Leibowitz, president and CEO of Grayton Mortgage, Inc.
Banks tie their home equity rates closely to interest rates set by the US central bank, which raised interest rates to slow inflation. With inflation cooling, financial experts expect the Fed to keep reversing course.
As the Fed continues lowering its benchmark interest rate, home equity lines will gradually come down, said Josh Jampedro, a mortgage expert at Home Loan Advisors.
What are the benefits of leveraging home equity right now?
Experts say you shouldn't necessarily hold off on getting a home equity loan just because rates are expected to drop in the near future.
“People are waiting and watching," said Christy Bunce, president at New American Funding, a mortgage lender. “Is it the best market yet? No. But I think it’s a very good market,” Bunce said.
For example, it's a good time to use a home equity loan to consolidate higher-interest debt, like credit cards or student loans. If you're struggling to pay off debt at 20% interest or higher, then transferring what you owe to a home equity loan with a 10% interest rate is still a win, Bunce said.
Or, if you have a low interest rate on your original mortgage and you need cash, it could be a good time to take out a home equity loan. If you snagged a 3% rate during the height of the pandemic, for instance, you wouldn’t want to lose it by refinancing.
Instead, you could add a second loan or line of credit to withdraw your equity, without interfering with your primary mortgage. Again, even if the home equity rate is 10%, when you blend that with your original mortgage rate, it balances out to around 6 or 7%, Leibowitz said.
"Taking out a home equity line of credit against the backdrop of a falling-interest-rate market isn’t bad," Leibowitz said. "You always have to weigh out all of your options." Plus, most home equity lines of credit have adjustable rates that go up and down over time. So if you take out a HELOC now, and the rate goes down, you’ll see that reflected in your bill.
What are the downsides of leveraging home equity right now?
If you take out a fixed-rate home equity loan right now, there’s always the risk that loan rates will drop and you’ll be stuck with a higher rate.
Taking out a home equity loan or line of credit is a major financial decision, and some folks may prefer to “optimize” their finances by waiting for the lowest possible rate. But the market is not always predictable.
Mortgage experts also advise considering more than just your interest rate. Think about what you can gain from taking out home equity right now, even if the rate isn't optimal. And just make sure you have a plan for paying back the loan so you don't risk foreclosure if you can't make payments.
Is now the right time to take out a home equity loan?
It could be advantageous to tap into your home equity, depending on your specific situation. If home equity can help you pay off other debt, like credit cards, it’s almost always a good time to do that. And if you don’t want to put off a major renovation, that’s more than enough reason, too.
“If you can put that equity to work for you, it’s a smart move. I don’t really see any downsides,” Bunce said.
Sure, you might be able to save a little bit of money as the Fed drops interest rates further. But the decrease will be gradual, over the course of months, so you might be stuck waiting a while.
“You never really know what the market is going to do,” Bunce said.
