Should You Get a Home Equity Loan in 2022?

It may be a good time to borrow against your home.

Many people borrow money in the form of taking on credit card debt. That's generally not a great solution, though, because credit cards tend to charge a lot of interest, and too high a credit card balance could damage your credit score. Taking out a personal loan is another option when you need money, and generally, you'll pay less interest than what a credit card will charge you.

But if you're a homeowner and are planning a big renovation in the new year, or have a need for money for a different reason, then your best borrowing option in 2022 may be a home equity loan. Here's why:

Put your home equity to good use

Home equity is the portion of your home you own outright. It's calculated by taking your home's value and subtracting the amount you owe on your mortgage from that number. If you own a home that could sell in today's market for $350,000, and you only owe $200,000 on your mortgage, it means you're left with $150,000 worth of equity.

Right now, U.S. homeowners are sitting on record levels of home equity due to the fact that home values have soared on a national level. In fact, collective home equity among U.S. mortgage borrowers reached $9.4 trillion in 2021's third quarter, according to real estate data firm Black Knight. When we break that number down further, it amounts to an average of $178,000 worth of equity per borrower.

If your home is now worth a lot more than it was a year ago, you, too, may have a lot of home equity to tap. Borrowing against your home could be a wise move if you have a specific need for money.

What might you take out a home equity loan for? Really, just about anything. There are no restrictions when it comes to borrowing against your home with regard to using that money. You can use those funds to:

• Renovate your home
• Repair your home
• Start a business
• Pay off existing debt, such as a nagging credit card balance or another loan that's costing you a lot in interest

And these are just a few examples.

The pros and cons of home equity loans

Home equity loans are generally pretty easy to qualify for when the equity in your property is there. And they typically charge less interest than other borrowing options, including personal loans.

That said, when you take out a home equity loan, your home itself is used as collateral for it. If you fall too far behind on your home equity loan payments, you could risk losing your home.

Also, with home equity levels being so high today, it can be tempting to borrow more than what you really need, or to borrow for less essential purposes. It's one thing to take out a home equity loan and use it to get a new roof or finish your basement, but it's another thing to borrow against your home to take a vacation. The latter is something you should, ideally, save up for, not borrow in order to finance.

But as long as you keep your loan amount to an affordable level, you may find that borrowing against your home is a great way to access the cash you need in the new year. And a home equity loan could make it possible to check some of your 2022 goals off of your list.