If you own a home, chances are it’s worth more now than it was just a few years ago. According to CoreLogic, home equity levels have increased by about $28,000 on average just in the last year. This led my partner and I to consider a home equity loan to build a workshop.
We got all the way to the signature line on the closing papers before we scrapped the whole deal. We realized that in our excitement to get the project underway, we had overlooked the realities of high interest rates and closing costs, which didn’t fit in with our long-term financial goals.
But just because it wasn’t a fit for us doesn’t mean it’s wrong for you. If you’re considering taking out a loan for a remodel or other home improvement project, here is what you need to know about home equity levels and whether a loan is a wise decision for you.
Why Have Home Equity Levels Risen?
Home equity levels, aka the amount a home is worth, have skyrocketed in recent years because more people want to buy homes than there are homes on the market.
“The combination of high demand and low inventory has led to rapid growth in home equity since early 2021,” says Matt Vernon, the Head of Consumer Lending at Bank of America. “As home prices go up, so does home equity, which is valuable to homeowners.”
What Is a Home Equity Loan?
Home equity loans allow homeowners to borrow money using the equity in their home as collateral. They usually have a fixed interest rate that is lower than other options, like personal loans and credit cards. “A home equity loan is often used for major expenses like home improvements or debt consolidation,” says Vernon.
What Do Rising Home Equity Levels Mean for Home Equity Loans?
Generally speaking, the more home equity you have, the more money you can borrow and the lower the interest rate. Lenders commonly offer up to 85% of the appraised value of your home minus any outstanding mortgage balance.
“That means substantial home improvement projects become more manageable and affordable because of this increased borrowing power,” says Saddat Abid, Senior Property Buyer and CEO at Property Saviour.
Should You Take Out a Home Equity Loan for Home Improvement Projects?
What to consider before taking out a home equity loan
Before taking out a home equity loan, it’s important to:
- See if you meet lender requirements with equity, credit score and debt-to-income ratio.
- Consider the overall expense of the loan, including interest, closing fees and monthly payments.
- Compare loan options and rates with several lenders.
- Consult a financial advisor to see if it fits your long-term financial goals.
- Create an itemized budget and include a contingency cushion for unexpected expenses.
- Figure out if your project will add value to your home.
“Projects that generate the most return on investment are a kitchen remodeling, bathroom repairs or energy-saving upgrades,” says Abid. “Of course, it remains imperative to balance loan costs against your capacity to bear additional debt.”
Is taking out a home equity loan worth it?
It depends. A home equity loan can help you add comfort and amenities to your home, but it’s only financially advantageous if it also increases your home’s market value — and if you can afford the payments, since your home will be used as collateral. Also, it may be worth waiting for interest rates to come down, since they are particularly high right now, which means you’ll be paying more in interest throughout the life of the loan.
“Individuals need to be cautious about their long-term commitment to payment and ensure that these changes are worth it,” says Abid. “Assess your ability to repay the loan comfortably so you don’t end up putting your home at risk.”
HELOCs vs. Home Equity Loans: What to Consider
Another option is a home equity line of credit (HELOC). With those, you can draw money from the loan as you need it, which can lower the amount of interest you pay, especially if you end up not drawing the entire loan amount. On the downside, those are often variable-rate loans, so the payment amounts can go up or down. However, with some banks, a HELOC can be converted to a fixed-rate loan once the project is complete.
“[Loans aren’t] necessarily right for everyone and every situation. The real estate market’s unpredictable nature adds an element of caution,” says Vernon. “Moreover, taking on more debt means committing to long-term financial responsibilities. Balancing potential benefits against risks and seeking expert advice can guide a well-informed decision.”
About the Experts
- Matt Vernon is Head of Consumer Lending at Bank of America and a member of the company’s Management Operating Committee. In his 30 years with the company, Matt has served in various roles focused on client solutions, relationship deepening, operations and strategic leadership.
- Saddat Abid is Senior Property Buyer and CEO at Property Saviour, a UK-based property buying service. He also produces a podcast, which gives property sellers practical tips on selling residential and commercial properties.
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