Should You Borrow Against Your Home in 2024?

If you need money, whether it's to start a business, renovate, or buy furniture, you have different borrowing options you can look at. You could take out a personal loan, which lets you borrow money for any purpose. Or, you could look at borrowing against your home equity.

Your home equity represents the difference between your home's market value and your mortgage balance. If you own a home that could sell today for $400,000 with a $250,000 mortgage balance, you've got $150,000 in equity. And you can borrow against it in the form of a home equity loan or line of credit (HELOC).

But is borrowing against your home equity a good idea today? Here's why it is -- and it isn't.

You may have more equity now than before

During the third quarter of 2023, the average U.S. homeowner gained about $20,000 in home equity compared to a year prior, according to CoreLogic. So you may have more options for borrowing against your home equity than you did in the past.

That said, now's not really a great time to be borrowing money in general. This holds true whether you take out a personal loan, auto loan, or home equity loan.

In 2022 and 2023, the Federal Reserve raised its benchmark interest rate numerous times to slow the pace of inflation. The Fed's efforts did indeed work, and inflation isn't as rampant now as it was a couple of years ago.

However, borrowing costs are now up across the board in the wake of the Fed's actions. So even though a home equity loan is often considered a relatively affordable way to borrow money, right now, because all borrowing is expensive, you may find that's not the case.

What's more, you could take out a HELOC, which is more flexible than a home equity loan in that you get a line of credit you can tap (until it's maxed out) over a period of multiple years. With a home equity loan, you commit to borrowing a lump sum of money at once.

However, the interest rate on HELOCs is generally variable, which means your monthly payments can be quite unpredictable. With a home equity loan, you lock in the same payments until that debt is paid off. And because of the Fed's rate hikes, HELOC borrowing is starting off expensive.

Borrowing against your home could be more affordable later this year

Since the Fed has made good progress in its fight against inflation, there's talk of the central bank cutting interest rates this year. If that happens, you may find that borrowing against your home equity becomes more affordable. So it could be a good idea to sit tight if you're able to wait to sign a loan. In fact, if you lock in a home equity loan now, you might lose out big time if borrowing rates drop several months down the line.

Now, you could make the case that it's less risky to take out a HELOC because rates are likely to drop this year, not rise, which means your HELOC is less likely to get more expensive in the near term. But again, any type of variable-rate debt carries risk, and you don't want to end up in a situation where you can't keep up with your payments. So all told, you may want to favor a home equity loan over a HELOC.

Remember, you might pay off that line of credit over many years. And it's hard enough to predict what interest rates will look like in five or 10 months, let alone five or 10 years.

Right now, borrowing conditions aren't so favorable for consumers. But things could change later this year. So while the start of 2024 isn't the best time to borrow against your home, later on in 2024, a home equity loan could make more sense.