People are still feeling the sting of inflation and it's tempting to turn to credit cards to cover expenses. However, you're likely not making the most economical decision if you've owned your home for a while. Instead, a better option may be to tap your home equity, especially given growing credit card interest rates, said Kurt Morris, home loans product manager at BOK Financial®.
"Most people understand the Federal Reserve rate hikes affected mortgage interest rates, but some don't realize it also increased credit card interest rates, which are typically high to begin with," said Morris.
Homeowners can tap into growing equity
Meanwhile, home equity has been increasing, which is good news for homeowners looking to leverage this equity for a lower-interest way to borrow money.
The average U.S. homeowner gained approximately $24,000 in equity during the past year to reach an average home equity of $298,000, according to the CoreLogic's Homeowner Equity Insights Report. Home equity is the difference between what you owe on your house and what it is currently worth, explained Morris.
The report also spotlighted changes across the BOK Financial footprint, with homes in many of the states experiencing double-digit equity growth:
Average home equity changes in 2023
| Arizona | $24,000 |
| Colorado | $20,000 |
| Kansas | $18,000 |
| Missouri | $18,000 |
| Arkansas | $17,000 |
| Oklahoma | $12,000 |
| New Mexico | $3,000 |
| Texas | -$6,000 |
Source: Homeowner Equity Insights – Q4 2023 | CoreLogic®
There are a number of ways that homeowners can tap into this equity.
Equity options
Before you embark on the journey of tapping into your home equity, work with a mortgage advisor to understand the differences between the three types of home equity options, Morris said.
Home equity line of credit (HELOC)
HELOCs give you access to a line of credit that you can tap into as needed for a set duration of time called a draw period. HELOC interest rates are adjustable, meaning you may see increases or decreases over time, and the line of credit will show up on your credit report.
Home equity loan
A home equity loan gives you all the proceeds of the loan, after closing, in one lump sum. It is sometimes referred to as a second mortgage. You then repay the loan over time with a predictable fixed rate. Repayment periods can vary from five to 30 years.
Cash-out refinance
This option replaces your mortgage with a new one. You use the loan to repay the original mortgage, and the remaining cash is yours to do with as you please.
Since interest rates on home equity products tend to be lower than the interest owed on other types of consumer debt, they can be a good way to pay for expenses or to pay down other debt. Here are some possible uses:
Pay for school
Leveraging your home equity can be used to cover educational expenses like university or trade school tuition, books and housing, or even to pay down student loans. However, the latter option should be considered carefully, Morris said.
"Paying off student loans using home equity could provide lower interest rates and reduce the amount you pay overall," he explained. "However, you'll want to review both the risks and rewards before transitioning from student loans to home equity borrowing options."
Morris suggests reviewing all federal student loan forgiveness programs you qualify for and how your private student loan rates are structured. Be sure to note that you could lose federal forgiveness opportunities if you consolidate your debt with a HELOC or home equity loan.
Some private student loans have a variable interest rate, which is also impacted by the current fluctuating rate environment. Paying them off using home equity allows you to move to a fixed rate, thereby giving you more stability on monthly payments, even when rates change in the future.
Pay down your credit card balances
The average credit card interest rate was 27.9%, as of Apr. 26, according to Forbes Advisor's weekly credit card rates report. "Accessing home equity through a line of credit could be a good option to pay down or consolidate debt," Morris said. "Lowering your interest rate is critical for debt reduction."
Cover medical bills
Life happens and sometimes sudden medical expenses come up. Hopefully, health insurance will cover some of the costs, but a home equity loan could cover your deductible and other out- of-pocket expenses. If you anticipate additional medical expenses in the future, a HELOC can be opened and only used as needed, Morris said.
This line of credit typically has an open period that extends quite a while–sometimes up to 10 years–before it closes. When you access funds from the line of credit for any purpose during that time, monthly payments will be required based on the current interest rate.
If you have a great business idea, but no start-up capital, you may consider using the equity you've built in your home to start or grow your own business.
Morris suggests starting by comparing a home equity loan with a small business loan to see which offers more benefits to you. Then, proceed with caution. If your business idea turns out to be more of a Cheetos Lip Balm (yes, that was an actual product) than a Chapstick, you could lose the money and be left with no equity in your home.
Invest in property
You could also use a cash-out refinance, home equity loan or HELOC to help you buy an investment property or a second home.
"Second home-loan interest rates and investment property interest rates are higher than primary home rates, in most cases," cautioned Morris. "But suppose you have enough equity in your primary home to cover the cost of your second home or an investment property purchase. In that case, you can make a cash offer and avoid the higher interest rate and higher closing costs altogether."
Home renovation or repair costs
If a recent storm damaged your roof or you're looking to build a new home office but don't have cash readily available, then a home equity loan may be a good option. In fact, the most common use for home equity is for renovations through a HELOC—and it may even help you save on your income taxes.
"In certain cases, interest paid on equity-related loans could be tax deductible," said Morris. "It is always prudent to consult with a tax professional to review your individual tax situation as it relates to your home equity."
Borrowing against your home's equity to improve your space may also be worth it, especially if you love your location or moving is out of the question.
Where to start
Morris recommends working with a trusted lender to figure out how much equity you need in your home before you can borrow against it. "Each lender is different, but most require somewhere between 10% to 20% equity," he said. "Then choose the best equity option for you and review the rates, loan terms and other fees."
Then, how you use that money is largely up to you. "As long as it's legal, you can use the money for any purpose—whatever you want or need," said Morris. "Home equity gives you a lot of options."
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