The real estate market has been booming, and homeowners are reaping the benefits. According to CoreLogic, homeowners are currently sitting on a staggering $17 trillion in equity as of the end of the first quarter of 2024. This means that the average homeowner gained $28,000 in equity compared to the previous year. Despite this wealth sitting idle, financial analysts like Greg McBride from Bankrate emphasize that home equity is not something that will lose value if left untouched.
While it is generally advised to leave your home equity alone, there are exceptions where tapping into it can be a smart financial move. One such scenario is when you need to undertake major home improvements or repairs. Experts suggest that using home equity to fund these projects can be a cost-effective solution. According to a survey conducted by Bankrate, 55% of homeowners consider home improvements or repairs a valid reason to tap into their home equity. McBride also points out that leveraging home equity for such purposes is more economical than resorting to personal loans or credit cards.
As of Aug. 7, the average interest rate for a home equity loan is 8.59%, while the average HELOC interest rate is slightly higher at 9.37%. In comparison, personal loans carry an average interest rate of 12.38%, and credit cards come with an exorbitant average interest rate of 24.92%. Despite cash savings being the primary source of funding for renovation projects, there has been a noticeable uptick in credit card usage. According to the 2024 U.S. Houzz & Home Study, 37% of homeowners financed their repair projects using credit cards, up from 28% in 2022.
While tapping into home equity can be a cost-effective financing option, it is not without risks. With the Federal Reserve raising rates, borrowers face higher interest payments. Therefore, it is crucial to have a clear plan to repay the debt promptly. Investing home equity in property upgrades can be a wise decision, as it not only maintains the home’s condition but also enhances its value. Research from the National Association of Realtors shows that certain projects, like new roofing and hardwood floor refinishing, offer a high percentage of cost recovery, making them worthwhile investments.
Common Pitfalls to Avoid
Despite the temptation to use home equity for discretionary expenses like vacations or luxury purchases, financial experts warn against such practices. According to McBride, financing vacations or buying depreciating assets like cars using home equity is ill-advised. Homeowners must prioritize using their home equity for investments that add long-term value to their property rather than unsustainable spending.
Home equity can serve as a valuable financial resource if used strategically. By making informed decisions and prioritizing investments that enhance your property’s value, you can maximize the benefits of your home equity while safeguarding your financial future.
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