A shortage of available homes, low-interest rates, and high demand has pushed home prices upward. Because of the increase in market value, many homeowners are sitting on large amounts of equity (about $185,000 on average). If you fall into this category, you may be wondering if now is a good time to apply for a home equity loan. Here’s what you should consider first.
Why Do Homeowners Tap into Equity?
Your home equity is calculated by taking the difference between how much your home is worth (market value) and how much you owe (outstanding home loan balance). There are many situations that could cause a homeowner to consider tapping into their equity. Here are some of the most common:
- Debt consolidation (credit cards, personal loans, etc.)
- Finance home improvements
- College tuition
- Wedding expenses
- Businesses expenses
- Life emergencies
- Second-home purchase
Factors to Consider Before Applying for a Home Equity Loan
High home prices have led many people to put their homes up for sale. But in some cases, where rents are high or relocating to an area with a lower cost of living isn’t possible, it doesn’t make sense to sell. These homeowners, instead, are drawing money from their homes. As interest rates continue to rise, more people are heading in the direction of home equity loans instead of cash-out refinances.
However, experts warn that just because you have equity doesn’t necessarily mean now is a good time to tap into it. It has to make sense for your unique situation. And everyone’s financial situation is different.
Here’s what you should consider before you apply.
Debt Consolidation
Consolidating high-interest debt is one of the main reasons that homeowners tap into their equity. But when it comes to using a home equity loan for debt consolidation, it’s important to exercise caution. If you have a habit of running up your credit card, it might not do you any good. You may end up in the same situation again, plus you’ll have an additional home loan to pay. If you’re using the loan to pay for a one-time event like an unexpected medical bill, however, it could be a helpful option.
Home Improvements
Using a home equity loan to finance home improvements is a great way to increase the value of your home. So long as you go about things the right way, it could end up working out to your benefit.
Maintain 20% Equity
No matter your reason for obtaining a loan, you’ll most likely need to be able to maintain 20% equity. This is a requirement that many lenders have today.
Considering a Home Equity Loan?
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