Should you tap your home equity?
Tapping your equity is an easy way to access cash, which you can then use to pay off credit cards, cover sudden bills or unexpected home repairs, or as a down payment on your next property (anything you want, really).
The move isn't always right, though. To see if tapping your equity is smart in your case, you should:
1. Consider interest rates
To access your equity, you'd likely use a cash-out refinance. This replaces your existing mortgage loan, and its interest rate, with a new one. It's a fine option if rates are equal to or lower than what you have on your current loan, but if rates have risen since then? It could be a costly move.
This is likely why cash-out refinancing has jumped in recent months. It's been largely reported that interest rates could increase in the coming months (they've already started that climb), and according to Black Knight, cash-out refinances were up 7.6% from July to August.
"With equity levels at record highs and interest rates broadly expected to tick upward in coming years, cash-out lending is likely to play a much larger part in the overall refinance market," said Scott Happ, secondary marketing technologies president at Black Knight.
Additionally, you'll also want to think about the interest rates on other products. For example, if you're looking to cover a much-needed repair on your rental property but don't have the cash, what are your options? Credit cards and personal loans come with much higher rates than mortgages. So, if you're using the money for a necessity and must finance it, cash-out refinancing is typically your most affordable option.
2. Make sure there's a benefit
Tapping your equity adds more debt, plain and simple. Whether you do a cash-out or take on a HELOC or home equity loan, you're still borrowing money.
Before doing this, you'll want to make sure there's a net benefit. If you're using the funds to pay off higher-interest debts, invest in a new property that will increase your profits, or add value to an existing property or investment, it's likely a wise idea.
However, if the money will just go toward a vacation or other non-value-adding item? It's probably not the best move for your business.
3. Be ready to qualify for good terms
Debt can be costly if you don't qualify for a great rate or term. Not only does it mean a higher monthly payment (and more financial pressure), but it results in more long-term costs as well.
Before you tap your equity, take a good, hard look at your credit report first. Is your DTI ratio low? Do you have a good credit score? Are there any blemishes that could make you a risky borrower? If so, you may want to improve those areas before tapping your equity.
It never hurts to shop around for quotes if you're not sure. Just be careful not to let any hard credit inquiries hit your report. Those will only hurt your score (and your chances at tapping that equity).
The bottom line
Home equity is up -- and rising. But tapping that equity isn't always the best move for your finances or your business. Before opting to tap yours, make sure there's a clear-cut benefit that outweighs any long-term costs.
If you need more guidance, talk to a financial advisor before moving forward. They can help you make the right decision.