Smart Uses of Home Equity: Why Timing and Purpose Matter

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In the vibrant landscape of home finance, homeowners are now managing a staggering $17 trillion in equity, a figure that marks a $28,000 average gain per household as of early 2024. While this substantial asset can be tempting, financial experts urge caution and strategic thinking. "Home equity is not like bread; it won’t go stale if it just sits there," advises Greg McBride, chief financial analyst at Bankrate.

When to Tap Into Home Equity

Tapping into home equity can be a savvy financial move, particularly for home improvements. According to a recent Bankrate survey of 2,294 adults, including 1,133 homeowners, 55% believe investing in renovations is a valid reason to access this asset. With average home equity loan rates at 8.59% and HELOC rates at 9.37% as of August, these options are notably cheaper than personal loans (12.38%) or credit cards (24.92%).

Despite the lower costs associated with equity loans, many homeowners still rely on savings for renovations—83%, according to the 2024 U.S. Houzz & Home Study. However, credit card use for home repairs has increased to 37%, highlighting a growing shift from savings to borrowed funds. While accessing equity is financially advantageous, it requires careful planning to manage higher rates and potential risks.

Enhancing Property Value Through Smart Investments

Investing in your home using equity can yield impressive returns. Jessica Lautz, deputy chief economist at the National Association of Realtors, emphasizes that strategic home improvements not only preserve but can also enhance property value. The latest Remodeling Impact Report reveals that exterior upgrades like new roofing offer a 100% cost recovery, while interior projects such as refinishing hardwood floors can recoup 147% of their cost. Lautz notes, "Hardwood floors have universal appeal, and a new roof ensures the home is move-in ready."

When Not to Use Home Equity

Experts advise against using home equity for vacations or purchasing depreciating assets like cars or electronics. Bankrate's survey found that over 10% of millennial homeowners consider these reasons valid for tapping into equity. McBride cautions, “If you need to finance a vacation, you can’t afford it.” He adds that financing big-ticket items with home equity means paying interest on assets that lose value over time.

The Bottom Line

Home equity can be a powerful tool when used wisely. Focus on home improvements that enhance property value and avoid spending on depreciating assets or discretionary expenses. With thoughtful planning, homeowners can leverage their equity effectively, ensuring both immediate benefits and long-term financial health.