As of the end of the first quarter of 2024, homeowners in the United States are sitting on a combined $17 trillion in equity, according to data from CoreLogic. On average, homeowners have gained $28,000 in equity compared to the previous year. This presents an opportunity for homeowners to leverage this equity for various financial needs.
When to Tap into Home Equity
While many financial experts advise against using home equity for unnecessary expenses, such as vacations or buying big-ticket items, there are certain situations where tapping into home equity can be beneficial. According to a survey by Bankrate, 55% of polled homeowners see home improvements or repairs as a valid reason to tap home equity. This allows homeowners to fund necessary renovations without resorting to high-interest personal loans or credit cards.
As of August 7, the average interest rate for a home equity loan is 8.59%, while the average HELOC interest rate is 9.37%. In comparison, the average personal loan interest rate is 12.38%, and the average credit card interest rate is a staggering 24.92%. This makes tapping into home equity a more cost-effective borrowing option for homeowners looking to fund home improvement projects.
Increasing Use of Credit Cards for Home Renovations
While cash savings remain the most common way homeowners fund renovation projects, credit card use has been on the rise. According to the 2024 U.S. Houzz & Home Study, 37% of homeowners paid for repair projects with credit cards, up from 28% in 2022. This trend highlights the need for affordable financing options for homeowners looking to make necessary improvements to their homes.
Despite the cost savings of using home equity to fund renovations, there are risks involved. With the Federal Reserve raising interest rates, borrowers may face higher rates when tapping into home equity. It is essential to have a clear plan for paying off the debt to avoid financial strain in the future.
Using home equity to invest in your home can have long-term benefits. Projects that enhance the value of your property may lead to higher profits when you eventually sell your home. According to the National Association of Realtors, exterior projects like new roofing have a 100% cost recovery, while interior projects like refinishing hardwood floors offer a 147% cost recovery rate.
Tapping into home equity can be a useful financial tool for funding necessary home improvements. However, it is crucial to weigh the benefits against the risks and have a clear plan for repayment. By leveraging home equity wisely, homeowners can enhance the value of their properties and enjoy the benefits of a well-maintained home.