Tapping into home equity: What you need to know before doing so

• The amount of home equity held by homeowners has reached a new record high of $32 trillion.
• Several methods exist for accessing funds from your home, including cash-out refinancing, obtaining a home equity loan, or utilizing a home equity line of credit.
• High borrowing costs make it more difficult to access housing wealth. Here's a look at current rates.

The St. Louis Federal Reserve reports that homeowners have a record-breaking $32 trillion in home equity as of the first quarter of 2024, thanks to the rise in housing prices.

According to Jacob Channel, senior economic analyst at LendingTree, one of the few positive aspects of today's housing market can be stated.

According to the Intercontinental Exchange's Mortgage Monitor, while the average borrower has $214,000 in equity that can be borrowed, 60% of homeowners have at least $100,000. Tappable equity, which is the amount most lenders will allow borrowers to take out while still leaving 20% in the home as a cushion, is the amount that most borrowers can access.

Existing homeowners have seen their fortunes grow due to the continued rise in home prices, resulting in record-high tappable equity, according to Andy Walden, vice president of research and analysis at the Intercontinental Exchange.

How to tap your home for cash

Despite the record amount of housing wealth held by homeowners, the cost of borrowing against one's home has increased to its highest point in recent years due to the Federal Reserve's series of rate hikes, according to Greg McBride, chief financial analyst at Bankrate.com.

High interest rates makes access to home equity more challenging.

McBride stated that the perception of using it as a low-cost funding source has persisted for a long time, but this mindset has shifted.

Is it the right time to purchase a home? Experts offer their opinions. Homeowners indicate that a 5% interest rate is the tipping point to relocate. An increasing number of unmarried couples are purchasing homes together.

Following the pandemic, numerous homeowners took advantage of low interest rates to refinance their mortgages and received the savings as a one-time payment.

With mortgage rates at approximately 6.3%, fewer homeowners are opting for cash-out refinances.

"As rates decrease, more cash-out refi opportunities may arise, but it won't be mistaken for 2021's 'ultra-low' rates, according to McBride," he stated, referring to the period following the Fed's benchmark rate reduction to near zero.

Despite the recent increase in mortgage rates, some homeowners are more willing to refinance now due to the decline in rates from their peak. In fact, mortgage refinance demand has increased by more than 100% compared to a year ago.

A second mortgage, also known as a home equity loan, enables borrowers to obtain cash by using their home as collateral. The loan is typically provided as a lump sum with a fixed interest rate.

For homeowners seeking to finance renovations, a home equity loan could be a suitable option, whether they aim to improve the home to their liking or to prepare it for sale in the near future, according to Holden Lewis, a home and mortgage expert at NerdWallet.

Notably higher than a 30-year fixed-rate mortgage, the current average home equity loan interest rate is 8.52%, according to Bankrate.

"As rates drop, some of the trepidation that homeowners have been experiencing about taking out fixed-rate home equity loans will dissipate, according to Lewis," he said.

A home equity line of credit (HELOC) allows you to borrow money against a portion of your home's equity, giving you a revolving line of credit with better rates than a credit card.

Although the average HELOC interest rate is close to 10%, it is lower than the average credit card interest rate, which is over 20%.

Factor in the terms, rates and risks

LendingTree's Channel reports that different lenders will provide varying terms and interest rates.

It is advised to consult with multiple mortgage companies or loan officers and consider all expenses before selecting the most suitable course of action.

Borrowing against your home comes with risks in addition to the rate and loan terms, he pointed out.

Failing to pay off a home equity loan can result in severe unfavorable outcomes, as stated by Channel.

If you don't repay your home equity loan, it can lead to foreclosure, and even if it doesn't, it can negatively impact your credit and make it harder for you to secure another loan, regardless of the loan type.

"To succeed, it's crucial to be meticulous and proactive," advised Channel. "Ensure you have the means to repay any borrowed items. This isn't something you should wing."