Today's Homeowners Don't Want to Tap Their Home Equity -- and They're Smart for Having That View

It's just not a good time to be borrowing money.

There's a reason today's home buyers have had such a difficult time breaking into the housing market. Not only are mortgage rates sky-high, but home prices are also up, creating a real affordability crunch.

But while higher home prices are a bad thing for prospective buyers, they're a good thing for existing property owners. That's because homeowners today are sitting on more equity than usual.

Home equity is defined as the value of your home minus what you owe on your mortgage. If your home is worth $500,000 and you owe $350,000 on your home loan, you're left with $150,000 of equity.

Home equity is something property owners commonly borrow against, whether in the form of a home equity loan or line of credit (HELOC). With the former, you borrow a lump sum of money you pay off at a fixed interest rate over time. With the latter, you get access to a line of credit you can draw from for a number of years.

While home equity loans and HELOCs may be fairly easy to qualify for these days given where home equity levels are at, new data from TD Bank reveals that most property owners aren't looking to borrow against their homes right now. And that's actually a good thing.

It's an expensive time to borrow

The reason home equity loans and HELOCs generally appeal to homeowners is that they can be a relatively cost-effective way to borrow. That's because these products are secured by the homes being borrowed against. That limits lenders' risk and allows them to charge relatively competitive interest rates.

But right now, borrowing rates are up across the board thanks to interest rate hikes on the part of the Federal Reserve. So these days, taking out a home equity loan or HELOC could mean getting stuck losing a lot of money to interest.

HELOCs are an especially dangerous borrowing product right now because unlike home equity loans, their interest tends to be variable. So if you take out a HELOC today, your payments could climb a lot over time.

It pays to steer clear of home equity loans and HELOCs right now

If you have a need for money to cover an essential home repair, then borrowing against your home equity isn't necessarily a poor choice. Similarly, if you owe a lot of money on your credit cards, and you have the option to consolidate that debt at a lower interest rate, then a home equity loan could make sense for that specific purpose.

But is now the time to take out a home equity loan or HELOC to pay for a home renovation? It probably shouldn't be.

TD Bank reports that 52% of homeowners who previously had a home equity loan or HELOC, or never did but are aware of the option, aren't likely to consider applying for either one over the next 18 months. And it could really pay to follow their lead until borrowing rates start to come down across the board.