Home prices are at an all-time high, and some experts are predicting they will increase by an added 3.5% by the end of 2024. This is bad news for anyone who wants to buy a home. At the same time, it’s an ideal situation for current homeowners who purchased a home before interest rates started going up. A growing number of these homeowners are tapping into their home equity by taking out home equity (HE) loans or setting up a home equity line of credit (HELOC). 

There are several reasons why optimistic homeowners don’t mind using their home as a security for a large loan. However, the main reason why homeowners are taking out HE and HELOC loans is to renovate the home. Nearly 70% of homeowners are either currently renovating their homes or are planning on doing so in the next two years. Improving outdoor space is the most popular home renovation project, followed by making the home sustainable and adding key features to the house. Kitchen and bathroom renovations top the list of interior renovations, followed by living room renovations. Over a third of these homeowners say they plan to sell the home at a later date. However, these plans could change over time if interest rates remain high. 

Another reason for the popularity of HELOC and home equity loans is that they give homeowners an alternative to looking for a new home in today’s market. The average mortgage interest rate, which was only 3.22% in January 2022, is now almost 7.8% as of November 2023. Some homeowners don’t want to lose their low-interest loans but have different housing needs than they did a few years ago. Many have found that borrowing a home equity loan is an ideal way to make needed interior and exterior renovations while they wait for home interest rates to come down. 

There is also a growing interest in using a home equity loan to consolidate other debts. A recent survey found that 70% of homeowners would be interested in a HELOC or HE loan that would enable them to pay off other high-interest debts. Such a move can be wise if a person can get a home equity loan with a lower interest rate than the other loans he or she needs to pay off. What’s more, managing one large loan is often easier than trying to manage several smaller ones with varying interest rates and payment deadlines. Even so, there is a huge gap between the number of people who are thinking about taking out a home equity loan to pay off current debts and those who actually do so. At the same time, home renovations and debt consolidation are by no means the only uses for a home equity loan. Homeowners who want to change careers or fund a child’s education can tap into their home equity to cover the cost of university tuition. HE loans are also commonly used to cover emergency expenses, the cost of a trip or wedding, or even for investment purposes. 

Using home equity loans for home renovations can be a smart move, experts note. The right renovations will add value to a home and homeowners who itemize their tax returns can deduct the interest from a HELOC or home equity loan when they file taxes. Using a home equity loan to pay off other debts can also be wise under certain circumstances, as homeowners can save thousands of dollars by consolidating payments with a high interest rate. Even so, taking out a HELOC or home equity loan is not without risks, as homeowners could lose a home if they are unable to pay back the loan. What’s more, as home sales plunge due to high interest rates and high home prices, a homeowner in a tight financial situation can’t count on being able to sell the home in order to avoid foreclosure. 

Homeowners in the United States are sitting on a whopping $30 trillion in home equity. What’s more, home values are set to rise for the foreseeable future. Even if interest rates come down in the next couple of years, a lack of inventory has made it impossible for the market to keep up with demand. In fact, the White House and the National Association of Realtors estimate that the market could be short up to 5.5 million homes. Holding onto a home with a low interest rate has never been a better idea, and homeowners who purchased a home before interest rates went through the roof now have plenty of equity they can tap into for home renovations, debt consolidation, and other purposes. Many are choosing to do just that, a move that comes with some risks but could benefit their overall financial position long-term. 

Have questions?

If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].