Homeowners across the United States are currently in possession of an impressive $17 trillion in equity, a figure that has significantly increased from previous years. This substantial equity growth translates to an average homeowner gaining $28,000 more in equity compared to the previous year. Despite this wealth tied up in home equity, many homeowners are hesitant to tap into it. According to Greg McBride, the chief financial analyst at Bankrate, home equity is not like perishable goods such as bread – it does not go stale if left untouched. However, there are circumstances where utilizing home equity may be a wise financial decision.
While leaving home equity untouched may seem like the safest option, there are situations where leveraging it can be beneficial. According to experts, one of the most justifiable reasons to tap into home equity is for making major home improvements or repairs. In a recent survey conducted by Bankrate, 55% of polled homeowners identified home improvements or repairs as a valid reason for accessing home equity. McBride emphasizes that using home equity for this purpose is a financially practical option compared to resorting to personal loans or credit cards.
As of the latest data, the average interest rate for home equity loans is 8.59%, while home equity line of credit (HELOC) interest rates stand at 9.37%. In comparison, personal loan interest rates average at 12.38%, and credit cards carry an average interest rate of 24.92%. Despite these variations, the most common method for funding renovation projects remains cash savings. However, there has been an increase in credit card usage for such projects, indicating a shift in financing preferences among homeowners.
While tapping into home equity may present a more affordable financing option, it is not without risks. With the Federal Reserve implementing rate hikes, borrowers are subject to higher interest rates, necessitating a clear repayment strategy. Jessica Lautz, deputy chief economist at the National Association of Realtors, suggests that investing in home improvements using home equity can be advantageous. Not only do these projects contribute to the maintenance and enhancement of the property, but they can also increase its overall value, potentially yielding profits upon sale.
According to the latest Remodeling Impact Report by NAR, certain home improvement projects have a high percentage cost recovery rate. For exterior projects, new roofing offers a 100% cost recovery, while interior projects like refinishing hardwood floors and installing new wood flooring boast recovery rates of 147% and 118%, respectively. Lautz emphasizes the universal appeal of hardwood floors and the essential nature of a well-maintained roof for potential homebuyers.
Although some homeowners may consider using home equity for discretionary purposes like vacations or purchasing big-ticket items, financial experts caution against such decisions. McBride emphasizes that financing expenses like vacations through home equity may not align with one’s financial stability. Additionally, investing in assets like cars or electronics through borrowed funds carries the risk of financing depreciating assets, which may not yield long-term financial benefits.
While home equity presents a valuable financial resource for homeowners, its utilization should be approached thoughtfully. By considering factors like interest rates, repayment strategies, and the long-term impact of home improvement projects, homeowners can maximize the benefits of their home equity without compromising their financial well-being.