If you've owned a home for at least a few years, chances are you have built up equity by simply paying your monthly mortgage payment and growing home prices.
Home equity is the portion of your property's value that you own, calculated by subtracting the mortgage amount from the current value of your home.
And having equity in your home doesn't just mean you've amassed more ownership, it also means you can use that equity to meet other financial goals you may have. For instance, instead of taking out a personal loan to remodel your home, you can borrow against your home equity. Because such a loan is secured by your home, it usually comes with a significantly lower interest rate than a personal loan.
If you've ever considered tapping into your home equity through a home equity loan or line of credit, the current economy and real estate market may have created the perfect time to do that. So it's worth considering these three reasons for using your home equity rather than a personal loan now, to take advantage of favorable conditions.
1. Homeowners have a record amount of equity
U.S. homeowners now have more than a combined $30 trillion in home equity, according to a recent study which amounts to $200,000 in tappable equity per homeowner.
While home values have risen in recent years, some homeowners have avoided tapping into that extra equity, perhaps because of lingering fears from the housing and financial crisis of 2008 or uncertainty about tax deductibility.
But now, if you've owned your home for a while, you may have more equity than you realize. And now could be the ideal time to use that value to accomplish other goals - like updating or renovating your home, paying for college tuition, or consolidating debt, for instance.
2. Real estate markets are cooling
Although homeowners have built up value in their properties in recent years, other factors are making it increasingly challenging to sell those properties. For instance, rising interest rates have contributed to the slowdown in real estate sales. Banks use the federal funds rate to set their interest rates for borrowers—so the price of buying a home is also increasing, resulting in a smaller pool of qualified buyers.
“Depending upon local tax and property values, buying power decreases with interest rate increases,"says Michael A. Kelczewski, Realtor, Brandywine Fine Properties Sotheby's International in Centreville, Del. “Consult relevant professionals to understand cost projections [in your area]. If economics commands value adds, perhaps remodeling is wise."
Using your current home equity to improve your home's value may help you further increase your home equity.
3. Remodeling projects could increase the value or sale-ability of your home
If you hope to sell your home in this cooling real estate market, certain updates or renovations may increase the likelihood of a sale - at the price you want. And using the home equity you have available can make renovations easier and more affordable. Because home equity loans are secured by your home, they usually offer a much lower interest rate than a personal loan or other forms of credit.
But if you plan to undertake a remodeling project, make sure it's a project that will add value and appeal to your home. “Enhancing a property specifically, such as creating complicated mobility enhancements, could impact value," Kelczewskisays. “[But] constructing an addition or first floor master typically appeals widely."
To determine whether the project you have in mind will add to selling potential, talk to a realtor in your area. If your goal isn't to sell but just to increase your own enjoyment of your property, now may be a good time, as you can take advantage of the equity you've built up in your home over the years.
If you need cash for a home remodeling project, consider tapping into your home equity rather than taking out a personal loan. A home equity loan or line of credit usually comes with a significantly lower interest rate, and the current real estate market makes it an ideal time to tap into your equity to improve your home's value.
