Want to borrow against your home? It pays to move as soon as possible

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You may want to tap into the equity in your home while you have even more.


Key points

  • New data reveals that home equity may have peaked in May.
  • As home values ​​fall, equity levels are likely to follow suit.
  • If you want to take out a HELOC, now is the time to look into it.

When you need money, whether to renovate your home or for another reason, you have different options to access it. You could take out a personal loan or even load a balance on a credit card. But a much more affordable way to borrow could be to leverage the equity in your home.

Home equity is defined as the market value of your home minus your mortgage balance. If your home is worth $400,000 and you owe $200,000 on your mortgage, that leaves you with $200,000 in capital, which you can borrow through a home equity loan or line of credit (HELOC).

Meanwhile, earlier this year, home equity levels hit a record high of $11.5 trillion during the second quarter. But new data from Black Knight reveals that home equity levels may have already peaked in May and could now slowly but surely decline. And so, if you’re considering taking out a home equity loan or HELOC, you might want to move as soon as possible – while you still have a good amount of equity to tap into.

The benefit of borrowing against home equity

There are two major advantages to taking out a home equity loan or HELOC. First, as long as your home equity is there, it’s pretty easy to qualify.

Home equity loans and HELOCs are secured by your home itself. As such, you might be able to get one even if your credit score needs improvement. Indeed, in the worst case, your lender could always force the sale of your house to be reimbursed.

Along these lines, you may find that a home equity loan or HELOC is a more affordable way to borrow than other options, such as personal loans. Personal loans are unsecured, meaning they are not tied to any specific asset. Thus, the lenders who issue them take on more risk, which tends to translate into higher borrowing rates.

The downside of borrowing against home equity

A home equity loan or HELOC is money you have borrowed and need to pay back. And that alone is something to consider carefully, because having debt payments hanging over your head could create a stressful financial situation.

Plus, even though home equity loans and HELOCs tend to charge competitive interest rates, you’ll still pay interest. And so you might want to keep your borrowing to a minimum to avoid racking up a lot of interest.

Finally, if you don’t meet your home equity loan or HELOC payments, you could end up losing your home. It’s a scary thing, to say the least.

Should You Borrow Against Your Home – And Soon?

If you’ve crunched the numbers and are confident you can handle home equity loans or HELOC payments, this could give you affordable access to cash. But if you are going to go this route, you might want to apply as soon as possible.

As home values ​​slowly decline, equity levels are likely to follow suit. And so you may have more borrowing options now than you will have in, say, six months.

Also, we don’t know if interest rates will continue to rise as the Federal Reserve does its part to fight inflation. Although interest rates aren’t at their lowest right now, at least you know what you’re dealing with. It’s hard to say what rates will look like next year, so if you’d rather not risk a huge round of increases, you might want to apply for your home loan or HELOC this month.

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