Homeowners are currently holding onto a massive $17 trillion in equity as of the end of the first quarter of 2024, according to CoreLogic. This equates to an average increase of $28,000 in equity per homeowner when compared to the previous year. While this might seem like a substantial sum of money, it is crucial to understand that home equity is not a liquid asset like cash. Greg McBride, chief financial analyst at Bankrate, aptly describes home equity as not being akin to bread that goes stale if left untouched.
Experts agree that one viable reason to tap into home equity is for major home improvements or repairs. In a recent survey conducted by Bankrate, 55% of homeowners view home improvements or repairs as a valid justification for tapping into their home equity. McBride points out that using home equity for such purposes is more cost-effective than opting for personal loans or relying on credit cards, with current average interest rates for home equity loans at 8.59% and 9.37% for HELOCs.
While traditional means such as cash savings remain the most common way for homeowners to fund renovation projects, credit card usage has been on the rise. According to the 2024 U.S. Houzz & Home Study, credit card usage for repair projects increased to 37% from 28% in 2022. However, it is essential to note that although tapping into home equity may be a more affordable option, it comes with risks, especially due to rising interest rates following rate hikes by the Federal Reserve.
Jessica Lautz, deputy chief economist at the National Association of Realtors, highlights the significance of using home equity to invest in your home, as these projects can help maintain and potentially increase the property’s value. The latest Remodeling Impact Report by NAR showcases that certain projects, like new roofing and refinishing hardwood floors, exhibit a high cost recovery rate, indicating their value in enhancing the overall appeal and worth of the property.
Avoiding Misuse of Home Equity
Despite the temptations, experts caution against tapping into home equity for frivolous expenses such as vacations or buying depreciating assets like cars or electronics. McBride emphasizes that financing non-essential costs through home equity is a red flag, indicating a lack of financial prudence. Moreover, financing the purchase of depreciating assets essentially means paying interest on items that lose value over time, which is not a wise financial move.
While home equity can be a valuable resource for homeowners to leverage for necessary expenses or strategic investments in their property, it is essential to approach it with caution and a well-thought-out plan. Understanding the potential risks and benefits of tapping into home equity is crucial in making informed financial decisions that align with your long-term goals and financial well-being.