Key Takeaways and Risks of Home Equity Loans
Home Equity Loans: Risks and Rewards
With housing prices on the rise, many homeowners are sitting on near-record levels of home equity. According to property data analyst CoreLogic, the average mortgage-holding homeowner’s stake is worth nearly $305,000, with an average gain of $28,000 in just one year.
As inflation continues to impact our economy, tapping into this equity for quick cash may seem like a tempting option. In fact, homeowners took out almost four times the amount of home equity lines of credit (HELOCs) in the first quarter of 2024 compared to 2021, as reported by ATTOM.
While borrowing against your home’s equity can be a smart move if used wisely for home improvements or debt consolidation, there are risks involved that should not be overlooked. Home equity loans and HELOCs are secured debts, meaning your home is on the line if you default on payments.
Additionally, fluctuations in home values can leave you with negative equity, where you owe more than your home is worth. Interest rates on HELOCs can rise, leading to higher monthly payments, and failing to make full payments during the draw period can result in a significant increase in payments later on.
Moreover, taking out a home equity loan can impact your credit score and increase your debt burden, affecting your ability to qualify for future loans or credit cards.
To protect yourself from these risks, it’s important not to borrow more than you need, create and stick to a budget, monitor your credit score, and shop around for the best rates and terms. Refinancing your HELOC into a fixed-rate loan and avoiding using home equity for everyday expenses, buying a car, investing, or paying for vacations are also recommended.
In conclusion, while home equity loans can be a valuable financial tool, it’s crucial to approach them with caution and fully understand the risks involved. By making informed decisions and taking proactive steps to protect yourself, you can make the most of your home equity without putting your financial stability at risk.
