Consumers Took Out 50% More Home Equity Loans and HELOCs in 2022 Than 2020. Here's How to Know if These Are Good Options for You

Home values are up on a national scale. And while that’s created a challenging real estate market for buyers, it’s a great thing for homeowners.

These days, U.S. homeowners have almost $30 trillion in equity, says the St. Louis Federal Reserve. That means a lot of people may be in a strong position to qualify for a home equity loan or line of credit (HELOC).

Meanwhile, many homeowners seized the opportunity to tap their home equity in 2022. Data from the Mortgage Bankers Association shows that homeowners took out 50% more home equity loans and HELOCs last year than in 2020.

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If you’re sitting on equity in your home, you may be eager to jump on that bandwagon. But whether you’re looking at a home equity loan or a HELOC, you should know that there are pros and cons to borrowing against home equity.

The upside to borrowing against home equity

When lenders write loans, they risk not getting repaid. But that risk gets whittled down when there’s an asset that can secure the loan in question.

Such is the case with home equity loans and HELOCs. Since they’re secured by home equity, lenders take on less risk. As such, these loans can be a more affordable means of borrowing money when you need to.

By contrast, personal loans are unsecured. If you don’t have great credit, you might struggle to qualify for one. Or, you might get stuck with a really expensive interest rate.

To be clear, the better your credit score, the greater your chances of getting approved for a home equity loan or HELOC. And if you want to snag a competitive borrowing rate on a home equity loan or HELOC, you’ll need strong credit. But if your credit score is only okay, you might still qualify for a home equity loan or HELOC because your lender knows you’re sitting on a valuable asset.

The downside to borrowing against home equity

Falling behind on any loan could damage your credit score. But falling behind on a home equity loan or HELOC could put you at risk of losing your home. So you’ll need to decide whether that risk is one you’re comfortable with.

The idea of losing your home due to a failure to repay your home equity loan or HELOC might drive you to borrow money in another way — or put it off altogether. And right now, that’s not such a bad idea seeing as how interest rates are up across the board.

Weighing your options

To decide whether you should tap your home equity for borrowing purposes, ask yourself:

  1. Do I need to borrow money right now?
  2. Is a home equity loan or HELOC really my best bet?

If you have great credit, you may find that you’re able to snag a competitive interest rate on a personal loan. And you might be more comfortable going that route because you’re not putting your home on the line.

Meanwhile, if you don’t need to borrow money right away, you may want to wait and see if rates come down. That could result in a lot of savings.

And if you’re worried that holding off on a home equity loan or HELOC is risky due to the potential for property values to come down, remember that if you’ve been in your home for several years, you may have had equity in it before home values started soaring a few years ago. So even if your home value drops in a year or two, borrowing against your equity might still very well be an option at that point.

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