- Borrowing against home equity can be an affordable way to get a loan.
- But because borrowing costs are likely to rise next year, home equity loans may become more expensive.
- If home values fall and homeowners lose equity, qualifying for a home equity loan could also get harder.
They might -- and they also might be harder to qualify for.
Owning a home has many benefits. Not only do you get the stability of predictable monthly mortgage payments (assuming you have a fixed-rate loan), but you also get to make your own rules instead of having to listen to a landlord.
Owning a home also means getting to borrow against the equity you've built in it. Home equity is defined as the market value of your property minus your mortgage balance. For example, if your home could sell for $500,000 and you owe $200,000 on your mortgage, you're left with $300,000 in equity.
Right now, homeowners are sitting on high levels of equity because property values are up on a national level. So you may be thinking it's a good idea to borrow against your home -- whether to finance a renovation, go on vacation, or another reason.
But while home equity loans can be affordable, there's a good chance they'll get more expensive in 2023. Here's why.
Borrowing rates could rise across the board
U.S. consumers have been grappling with inflation since the latter part of 2021. And the Federal Reserve is trying to step in and do something about it -- namely, by moving forward with interest rate hikes.
The logic is that as borrowing gets more expensive, consumers are apt to spend less. Once that happens, supply chains should be able to catch up to consumer demand, and prices should start to retreat to more moderate levels.
While the Fed might have good intentions, one unwanted consequence of continual rate hikes is that borrowing could become prohibitively expensive for consumers. And though you'll generally pay less interest on a home equity loan than you will on, say, a credit card balance, if rates rise universally next year, a home equity loan could cost more than you've bargained for. As such, it's fair to say that 2023 may not be the best year to borrow against your home.
Qualifying could get trickier
Generally, home equity loans are pretty easy to qualify for when the equity in your home is there. But as home values start to slide (which is likely to happen in 2023), equity levels are apt to decline. And while that's not to say that you'll be left with no equity if that happens, you could end up with a lot less.
So if you're seriously thinking about borrowing against your home equity, you may want to do it sooner rather than later. If you wait too long, you may find that a home equity loan is less affordable. And also, you may find that you're not able to borrow as much as you'd like because your equity level has dropped.
But you don't want to rush into a home equity loan either. If you borrow too much, to the point where you can't make your payments, you'll risk losing your home. And that's a truly terrible consequence you'll want to avoid.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.