Home equity is dropping. Here's what to do now.
Homeowners have enjoyed substantial growth in the value of their homes for nearly a decade — but today's market could soon make rising home values less common.
In fact, a recent report from CoreLogic found that the average U.S. home borrower saw their home equity decline by $5,400 year-over-year in the first quarter of 2023. According to the report, that's the first annual home equity loss since early 2012.
If you're a homeowner, your home equity is one of the best resources you have for accessing cash when you may need it. Even if home prices are showing signs of dropping, you may still be sitting on a large amount of equity today. That said, there are steps you can take now to take advantage while your home equity is still high.
Thinking about tapping into home equity today? Compare the best home equity rates you can qualify for here now.
What is going on with home equity?
Home equity may have slightly dropped in the first quarter of the year, but you could still be sitting on a lot of potential home value.
"Home values typically keep pace with inflation with a few exceptions," says Shawn Ballinger, CFP, founder of Columbus Street Financial Planning. "With the strong demand and short supply of single-family homes in the U.S., prices should stay strong, but some weakness is necessary after the pull-forward supply pressures of the pandemic."
In fact, the same CoreLogic report says that average equity is still up significantly from the start of the pandemic and home prices are still expected to appreciate this year overall.
"Home equity trends closely follow home price changes," Selma Hepp, CoreLogic chief economist, said in the report. "As a result, while the average amount of equity declined from a year ago, it increased from the fourth quarter of 2022, as monthly home prices growth accelerated in early 2023."
That means, despite some overall drops in home equity, you could still be in a prime position when it comes to increased home value.
Tap into your home equity now and secure the best rates available today!
How to use your home equity now
There are a few different ways you can access your home equity today. These loan types can help you finance renovation projects or other home improvements to keep your home value high even when prices fall. Here are three to consider:
Home equity loan
A home equity loan is sometimes called a second mortgage. These loans are secured by your home and based on the amount of equity you've built up in the home, or your current home value minus the amount you still owe toward your mortgage.
Typically, home equity lenders will allow you to borrow up to 80%-85% of your home equity. Home equity loans generally carry fixed rates — which today may be as low as 7%-8% APR — and you'll pay your loan off in fixed monthly payments over a period of five to 30 years.
HELOC
Home equity lines of credit (HELOCs) are similar to home equity loans in that they are based on the equity you've built in your home. But when you borrow using a HELOC, you'll only pay interest on the amount you actually use, not the entire credit line you're approved for. HELOCs also tend to carry variable interest rates, which can change over the account lifetime. If you anticipate interest rates going down in the future, a variable rate could help you save over the long term.
It's also important to note that both home equity loans and HELOCs may have tax advantages depending on how you use them. The interest you pay on them is tax deductible, as long as they're used for qualifying home renovations, according to the IRS.
Explore today's top home equity rates and see what you can qualify for here now.
Cash-out refinance
Unlike the previous two options, a cash-out refinance doesn't require taking on an additional loan. Instead, it requires refinancing your current home loan. In doing so, you can get a larger loan and take the difference between the loan amount and what you still owe as cash.
Cash-out refinances may be an especially good option if your current mortgage rate is high. You may score a lower rate by refinancing in this case. However, if you already have a very low mortgage rate, you could pay a lot more over time if you refinance at a higher rate today.
Explore your refinance options here to see if it's right for you.
The bottom line
In today's market, home values could soon see a decline — especially for people in certain areas of the country. But after nearly a decade of rising home values, you may still have access to a large amount of equity in your home. Consider using a home equity loan, HELOC or cash-out refinance today to take advantage of that equity while you can — and score great rates compared to alternatives in today's high rate environment.
