Is Now a Good Time to Tap Your Home Equity?

The quick answer? Yes and no.

One of the benefits of owning a home as opposed to renting one is getting to build equity in that property. Equity is defined as the market value of your home minus the balance you owe on your mortgage. If your home is worth $500,000 and you owe $300,000 on your mortgage, that leaves you with $200,000 of equity.

But having home equity doesn't just give you bragging rights. Rather, that equity is something you have the option to borrow against, whether in the form of a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.

If you need money -- say, to renovate your home, pay off credit card debt, or start a business -- then you may be interested in borrowing against your home equity. But is now a good time to go that route?

Why it is a good time to tap your home equity

Ask anyone who's looking to buy a home right now, and you'll hear the same thing. Home prices are through the roof, so much so that buyers are constantly getting priced out of the market.

That's not a great thing for those trying to purchase a home. But it's a good thing for current property owners. Right now, U.S. homeowners are sitting on record levels of equity, and that alone makes the case to borrow against yours now -- while those home values are still strong.

Why it's not a good time to tap your home equity

While you may currently be sitting on more home equity than you'd had in the past, you should know that borrowing has gotten really expensive across the board. These days, you're likely to pay a much higher interest rate on a home equity loan, HELOC, or refinance than you would've paid a year ago. And so while equity-based borrowing can be easy to qualify for, it could also be a costly prospect right now.

What's the right call?

Tempting as it may be to borrow against your home equity, the reality is that it will cost you more now. But if you know you have a need for money that won't go away, tapping your home equity may be your most cost-effective option. And you may be better off taking out a home equity loan or HELOC or doing a cash-out refinance now than in a year from now.

We don't know how home prices will fare over the next 12 months. But if they start to drop to more moderate levels, property owners will be left with less equity in their homes.

Furthermore, while borrowing rates are up right now, there's a chance they'll stay that way or rise even higher over the next 12 months. And so if you put off your home equity loan, HELOC, or refinance for another year, you might land in a situation where you can't borrow as much and are stuck with an even higher interest rate.

Of course, it's possible that home values will hold steady and that borrowing rates will drop. But without a crystal ball, that's impossible to predict. And so if you know you need money, now may be your best time to act, even if it's not the most ideal time in the grand scheme of things.