There are a few big things to know before you start the process of tapping into your home equity this spring.
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Borrowing money can be costly these days. Credit card rates are sitting at an average of about 21%, and personal loan rates are in the double-digits, too. If you're a homeowner, though, you may be able to access the funds you need to borrow more affordably via tools like a home equity line of credit (HELOC) or a home equity loan.
"With today's higher cost of living, credit card debt in the U.S. continues to rise as people lean more heavily on plastic to cover everyday expenses," says Karri Noble, senior vice president of home equity operations at loanDepot. "But if you own a home, you also have some meaningful advantages, especially the ability to tap into your equity through a HELOC or home equity loan."
Still, tapping into home equity isn't the right move for everyone, and in today's economic landscape, there are some unique factors you'll want to take into account before you do.
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What to consider before tapping your home equity this April
A lot is going on in the world right now, both politically and economically, and it will all impact your finances and borrowing prospects in the coming months. Here's what experts say you should think about before using your home equity this April.
Rates probably aren't dropping anytime soon
If you're holding out for lower interest rates before tapping your equity, you may want to adjust your strategy. In the near term, experts say home equity and HELOC rates are likely to stay in the same range they're in now — about 7% to 8%.
Home equity and HELOC rates are both influenced by the Federal Reserve's rate moves, though HELOC rates are more so, and the Fed hasn't increased or decreased rates since December. According to the CME Group's FedWatch Tool, it likely won't make another move until September at the earliest.
"I expect the rates to stay the same," says Jeremy Schachter, branch manager at Fairway Home Mortgage. "With the current environment with Iran, I don't expect the Feds to lower rates in the next month or two. We are also getting a new Fed Chair in May, and his vision for rates may be more aggressive than Chairman Powell's views."
The Fed could cut rates later this year, experts say, but with the Iran conflict in full swing and no end in sight, experts say it's hard to predict at the moment. That means the trajectory of equity rates is also hard to anticipate.
"In the next month or two, rates should stay stable; however, they could possibly tick upward slightly due to geopolitical concerns," says Bruce Maginn, partner and financial advisor at Solomon Financial. "In the next six- to 12-months, the outlook for lower rates is favorable as long as inflation continues to cool and the Hormuz Strait is reopened for business."
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Home values are dropping in some markets
One big factor to note before tapping your equity right now is that home values are falling in many areas. Home prices are down just over 2% nationally from one year ago, according to Realtor.com. In some cities, they're down more than 4%.
"There is some risk," says Amanda Erebia, director of retail banking at Amegy Bank. "If home values decline after borrowing, homeowners could see their equity reduced or in some cases, become underwater."
Being underwater on your mortgage would mean that you owe more money on the home than it's worth. That would make it impossible to sell your home and settle your mortgage balances using the profits. It basically depletes your options, especially if you're hoping to move soon.
Of course, home values aren't falling everywhere, and since most homeowners are sitting on a lot of equity these days, going underwater isn't likely unless values take a very steep turn. Still, experts say it's important to be cautious and borrow from your equity conservatively, given today's conditions.
"Keep at least 30% left of equity in your home after you take out a HELOC to be safe," Schachter says. "Then, if prices fall, you wouldn't be upside down for the most part."
HELOCs and home equity loans aren't created equal
Knowing what you need the funds for is incredibly important in today's landscape, particularly if you're deciding between a home equity loan and a HELOC.
For example, with stock market volatility, rising gas prices and geopolitical tensions, you might find you want a financial safety net in case something unexpected happens. In this case, a HELOC would be a good move, as it allows you to withdraw money as needed. You'll also only pay interest on the amount you withdraw from your credit line — not the entire lump sum (as you would with a home equity loan).
"Think of it like a more responsible, lower‑interest credit card," Noble says. "You can pay down your balance and redraw funds during the draw period, which isn't possible with a home equity loan."
If you're on a tight budget, need a specific amount now and want a predictable payment you can plan for — especially if you're worried about potential job loss or another big financial change, a home equity loan can be the better move. These usually have fixed rates (while HELOCs have variable ones) and stable monthly payments.
"It really comes down to your comfort level and your goals," Noble says. "A home equity loan offers a fixed rate, which makes it a strong option if you want stable, predictable payments. However, these loans amortize from day one, so your monthly payments will likely be higher than a HELOC's at the start of the loan."
The bottom line
If you're not sure if tapping your home equity is the right move right now, or you need help deciding what equity product is best, talk to a mortgage professional. They can walk you through your options and help you make the best decision.
Edited by Angelica Leicht
