When Is it OK to Tap Home Equity?

September 20, 2018

As home prices continue to rise, homeowners are finding they’re sitting on record amounts of home equity. People have mostly been shy about tapping into that wealth—but a new survey Bankrate.com survey of 1,000 consumers shows they have plenty of reasons they may want to take out a loan to unlock it.

Home equity survey

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Consumers’ “growing penchant toward debt might make it tempting to tap into their home’s value,” says Greg McBride, Bankrate’s chief financial analyst.

Nearly three quarters of homeowners recently surveyed say that home improvements or repairs are an acceptable reason to access the equity they have in their homes. In fact, more than half of those surveyed say that is the best reason to apply for a cash-out refinance loan or home equity line of credit (HELOC).

Survey respondents also cited other reasons they’d be tempted to use their home equity, including to consolidate debt (44 percent); pay for tuition or other educational expenses (31 percent); keep up with regular household bills (15 percent); and make other investments (12 percent). Nine percent of homeowners say they believe it would be a good idea to use home equity to purchase big-ticket items, such as appliances and furniture.

People with lower incomes were more likely than those who earn more to say it’s OK to tap into home equity to meet ordinary expenses, the survey found. Meanwhile, millennials seem more willing to tap into home equity than older generations, the survey found. Twenty-two percent of millennial respondents say that borrowing from home equity to pay day-to-day bills is a viable option, compared with 12 percent of members of older generations.

Many households may be overstretched financially, which could heighten the temptation to borrow. Forty-four percent of Americans say they could not cover a $400 emergency expense out of pocket, according to a recent Federal Reserve report.

“With the sorry state of emergency savings and increasing levels of consumer debt in a rising interest rate environment, it’s a matter of ‘when’ not ‘if’ more homeowners turn to home equity to fund home improvements and repairs, or consolidate debt,” McBride noted in the survey’s report.

Using equity to pay for home improvements that increase the value of your home can help rebuild any of the equity taken out, McBride says. The new tax law, that went into effect this year also allows homeowners to deduct the interest they pay on home equity loans and HELOCs if the proceeds are used to finance improvements that add significant home value.

Still, financial experts recommend caution for homeowners who are thinking of borrowing against their home equity, especially because using your home as collateral for a loan means you could lose it if you are unable to repay the lender.

“For a disciplined homeowner, using home equity to consolidate debt at a lower interest rate can be a savvy way to cut interest costs and accelerate debt repayment,” McBride says. “But for undisciplined homeowners, it ties up an asset that is put at further risk of foreclosure while the temptation to run up high-cost debt all over again proves difficult to resist.”

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