Now is a perfect time to take out home equity - here's why:
Home equity, first and foremost, is a way to save excessive amounts of money on your home – but it can also be used as a significant finance tool. Home equity is reached by subtracting mortgage debt from the current value of the home, which many homeowners can use to their advantage as home prices keep rising.
We saw over the course of 2020 that the home equity limits increased considerably. To be exact, the amount of money that equity borrowers were able to obtain for their homes (also known as tappable home equity) rose by approximately $735 billion – this is the largest annual increase by dollar that’s been recorded, bringing the collective amount of home equity nationwide to an approximate amount of $5.4 trillion. This is 10% higher than it was in 2005, during its pre-recession peak.
This increase was more than even the most seasoned real estate professionals were expecting, and it is expected to keep rising throughout 2021, in accordance with the rising home prices. So, what can you do with this seemingly endless rise in home equity? A smart decision that many homeowners have been making is to use the extra money to pay off other parts of the home.
Many people have been opting to use their “tappable equity” to make home improvements, such as necessary repairs or desired remodeling. Others have even used it outside of the home, to pay for expenses such as education or vehicles. Some have also used it to pay off expensive debts that had been following them around. Essentially, the possibilities are endless.
It is important to note that most lenders will require (or at least highly recommend) that you keep at least 20% of your equity in your home as a crutch, just in case some unexpected decreases in home prices were to happen. Nevertheless, if you were thinking of taking out home equity loans, there is no better time than now. As long as the shortage of inventory continues, the value of homes will keep increasing – and so will the home equity limit.