Is A Home Equity Loan The Right Move For You NOW?

By Corrie Forcet, Realtor® of The Forcet Group | KW Suburban Tampa

If you are a homeowner, you are likely keeping an eye on your home value and can't help but notice your home equity growth since 2021 & 2022. You have flirted with the idea of tapping into that mini gold mine you are sitting on and taking out a home equity loan or line of credit to help take some of the pressure off the soaring prices these days. But before you turn the faucet on, consider some important factors that require caution, and take note of our solutions. This article may help you decide if a home equity loan is right for you:

Interest Rates Can Rise With Some Loans

There are two main types of loans that use your home equity as collateral: home equity loans and home equity lines of credit (HELOCs). While loan terms vary by lender and product, HELOCs typically have adjustable rates, meaning the payments could increase as rates increase. As we know full well, the Fed will raise rates in an instant if they deem it necessary. You could wind up paying more than you originally signed up for. If you are interested in HELOC borrowing, you may consider searching for a lender that can give you a fixed-rate line of credit or a HELOC conversion.

Remember, A Home Equity Loan Means Using Your Home As Collateral

Unlike defaulting on a credit card or an unsecured personal loan — where the penalties are fees and a lowered credit score— defaulting on a home equity loan or HELOC means that you could lose your home. Really consider whether you have sufficient income to make regular payments, as well as whether you can afford them if your income changes unexpectedly. Speak with a trusted financial advisor or Realtor® to make sure this is the best solution for you.

Equity Is Not Fixed And Can Rise & Fall

It's a reality that should be taken seriously. If home values dip, a homeowner can become upside-down on their mortgages, which happens when you owe more than the value of your home. With Tampa Bay being an up-and-coming real estate haven, home values are not likely to plummet as they may in other parts of the country. But the caution would be never to borrow more than you need. Even better. . . use your loan funds to make improvements on your home to increase its value!

So When Are Home Equity Loans Most Risky, And When Are They BEST?

Because home equity loans use your home as collateral to secure the loan, it’s important to weigh the pros and cons of this type of borrowing carefully. A home equity loan could be a great idea if you use the funds to make home improvements that will increase your home value or consolidate debt with a lower interest rate. However, a home equity loan is a bad idea if it will overburden your finances or only serves to shift debt around.

What's The Bottom line?

Home equity loans can help homeowners take advantage of their home’s value to access cash easily and quickly. Borrowing against your home’s equity could be totally worth it if you’re confident you can make payments and do so on time, especially if you use the loan for improvements that increase your home’s value. However, there are several risks involved if you fall behind on those payments. Consider the risks discussed in this article, understand the lender’s terms thoroughly and speak to a trusted financial advisor or Realtor® before deciding to take out a home equity loan.