Why you should get a HELOC when home prices are high
When it comes to funding large expenses or covering emergencies, many people turn to options like credit cards and personal loans. But these products carry high interest rates — credit card rates are currently around 20%, and personal loan rates are about 8% or higher. This means you'll repay considerably more than the original amount you borrowed.
If you're a homeowner, you can access extra cash at much lower rates by tapping into your home equity, or the value you've built up in your home. Two ways to do this are with a home equity loan or home equity line of credit (HELOC).
A HELOC is a great option for people who want ongoing access to funds they can withdraw as needed. HELOCs work like credit cards in that you're approved for a certain amount, and you may withdraw funds up to that amount whenever you need during the draw period. Unlike credit cards, however, HELOC rates are in the single digits (currently around 7.8% to 8%.).
HELOCs can be particularly valuable when home values are high, as is the case right now. In January, home prices increased 3.8% year over year. In February, values rose by up to two digits in 40 major U.S. cities, CBS News reported. And while growth is slowing, prices may remain high for some time. Zillow's latest Home Value and Sales Forecast predicts home values will rise 0.6% from March 2023 to March 2024 as home inventory continues to be low.
If your home's value has risen, read on to learn why now is a great time to consider getting a HELOC.
Check out HELOC rates here to see how much you might qualify for.
Why you should get a HELOC when home prices are high
High home prices aren't great for buyers, but they're great for homeowners looking to cash in on their equity.
Your home equity amount depends on two factors: how much of your mortgage balance you've paid down and what your home is currently worth. To calculate your home equity, subtract your current mortgage balance from your home's current market value (which you can estimate using a site like Zillow).
For example, let's say you bought your home for $400,000. Since then, you've paid off $100,000 of your mortgage, bringing the balance down to $300,000. Meanwhile, your home's value rose to $500,000. Your home equity in this situation would be $200,000 ($500,000 - $300,000).
Now, consider your home's value rose even further to $600,000. In this case, your home equity would be $300,000 ($600,000 - $300,000). You've still paid the same amount toward your mortgage, but you have an extra $100,000 in equity.
The higher your home's current market value, the more equity you can draw from — even if you haven't made a huge dent in your mortgage balance. You can typically borrow 80% to 85% of your home equity with a HELOC.
If you think a HELOC might be right for you, start exploring your options here.
Benefits of a HELOC
If you want to convert your home's equity into cash, there are many reasons why a HELOC is worth considering, including
- Interest rates are generally lower than other forms of credit.
- You only pay interest on the amount you use.
- You can use it for anything you want.
- If you use the funds for IRS-approved purposes, interest may be tax-deductible.
If you'd rather get a lump sum of cash for a one-time expense, a home equity loan might be a better fit for you.
The bottom line
When home values are high, you can get even more from a HELOC. So, if you don't need the funds immediately, it's worth waiting if home values are currently low in your area. In the meantime, you can boost your potential HELOC amount by building equity with home improvements like replacing an old roof or upgrading a kitchen or bathroom. To get the best HELOC rates, shop around and compare quotes from multiple lenders.
