Rising home prices brought on by scarce inventories have some homebuyers putting off a new home purchase and instead using their growing equity to improve their current dwellings.
If you got "house fever" and are now regretting the costs, you're not alone.
Many buyers saw the housing boom of the last few years as their opportunity to invest, only to realize that inventory was scarce and consequently prices were high. In fact, a July 2022 survey from Anytime Estimate found that 72% of recent homebuyers experienced regret, citing spending too much and making a buying decision too quickly.
If you were able to avoid that regret but are still really hoping for a new home, you might want to consider using the equity in your current home to spruce up your existing dwelling to make it feel like new, according to experts.
"It might be more beneficial for homeowners to make changes to their homes with improvements rather than buying a whole new home," said Daryl Brown, mortgage banker with BOK Financial Mortgage®. "Others might really want to buy a new home, but after considering all of the pieces of the puzzle, they may realize that redoing their current home might be a better fit—at least for now."
Current homeowners have two options to address these upgrades: a home equity loan or a home equity line of credit (HELOC). Both can be used to make improvements on a dwelling.
If you're unsure whether a HELOC or a home equity loan is right for you, here are some questions to ask your lender:
- What is the rate and how will it change?
- How much equity do I need to have in my home before I'm eligible for a HELOC or home equity loan?
- What is the period that I can draw from the loan?
- When does repayment start?
- Are there any other costs associated with a HELOC or home equity loan that I need to know about?
The demand for these and other home equity products has risen over the past three to five years, spurred by rising home prices and credit card debt, Brown said.
Traditionally, homeowners would make a down payment of between 3.5 and 5 percent and then work to pay down the principal while their homes appreciated at a modest rate—4.3% annually since 1991, Brown said.
But over the past three years, home prices have appreciated rapidly. Between April 2021 and April 2022 alone, home prices rose 18.8% nationally, according to the Federal Housing Finance Agency. As a result, homeowners have been able to take advantage of their equity much sooner.
Meanwhile, credit card debt is at an all-time high, totaling $930 billion as of December 2022. To consolidate this debt, some homeowners are taking advantage of lower rates on home equity loans and lines of credit, Brown noted.
HELOC vs. a home equity loan
If you are considering a HELOC or a home equity loan, keep these important distinctions in mind:
- A HELOC uses your home's equity to allow you to apply for an open line of credit, which you can use on an as-needed basis. Usually this has a variable rate, but it does offer flexibility for drawing/paying back what you use.
- A home equity loan allows you to borrow a lump sum of money against your home's existing equity. It is typically a fixed rate loan that you pay back whether you're using it or not.
"A HELOC provides flexibility over a long period of time, typically five or 10 years," Brown said. "In addition, you may draw from the HELOC as needed, and pay back only on what you owe."
For example, a homeowner can open a HELOC for $50,000 to make home improvements. Perhaps there are several home projects that will equal $50,000 in costs, but not all of those costs will be incurred at once. They can draw $10,000 to replace their deck this summer, $5,000 to remodel the kitchen in the fall and $15,000 to replace the roof in two years.
HELOC funds can be drawn and paid back at the moment the funding is needed for the project, Brown said. You could use the money to consolidate debt; to pay for home improvement projects, college expenses or medical expenses; to invest in more real estate or toward any number of other expenses.
Although the current rising rate environment is a potential downside to using a HELOC, some lenders might provide the option to fix your rate on the funds you draw, Brown said.
Borrowers who are concerned about variable rates also may opt for a home equity loan instead, he explained. Home equity loans offer a fixed interest rate with set monthly payments for a fixed amount of time, which can help some borrowers feel more comfortable with using home equity.
Navigating the lending process
With either option, homeowners can expect a similar process and turnaround time to that of a mortgage loan, including income verification, appraisal and title work, Brown said.
"These processes take time, but lenders typically charge much less in fees on home equity products than a mortgage loan," he said.
Best advice? "Be transparent with your lender about your goals, and have your short-term and long-term goals in mind."
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