Struggling With Higher Living Costs? Your Home Equity Can Help

If inflation is wrecking your budget, you may want to tap the equity you have in your home.

Higher living costs aren't just impacting low-income households these days. Even moderate earners are struggling to make ends meet with everything from gas to groceries to utilities costing more.

In January, the Consumer Price Index, which measures the cost of consumer goods, rose 7.5%. That's the highest increase on record since 1982.

If you're having difficulty paying bills due to rampant inflation, you may need to borrow money temporarily to keep up. You could run up a tab on your credit cards and pay it off over time, but if you go that route, you could end up not only hurting your credit score, but also racking up quite a bit of costly interest.

You could also apply for a personal loan, which will generally let you borrow at a lower interest rate than a credit card will. However, if you own a home, you may have a more cost-effective option.

Is it time to tap your home equity?

Equity refers to the portion of your home that you own outright, and you can determine how much of it you have by taking your home's market value and subtracting the balance you owe on your mortgage. Homeowners are currently sitting on a record level of home equity. If you're in that boat, you might consider taking out a home equity loan.

It's a common myth that if you take out a home equity loan, you need to use that money to improve your home. Like a personal loan, a home equity loan lets you borrow money for any purpose. And while there are potential tax benefits to be reaped by taking out a home equity loan for renovation purposes, you can absolutely borrow against your home equity to cover regular living costs.

The upside of home equity loans is that they're pretty easy to qualify for once the equity in your home is there. And they tend to come with lower interest rates, making them affordable.

In fact, you may be able to snag a much lower interest rate on a home equity loan than on a personal loan, especially if your credit isn't all that great. That's because a home equity loan will use your home as collateral, whereas personal loans are unsecured, which means they're not tied to a specific asset your lender can access to get repaid in a pinch.

Of course, the downside of home equity loans is that falling behind on yours could put you at risk of losing your home. But if you borrow judiciously, a home equity loan could be just the thing that gets you through these tricky financial times.

When will inflation cool off?

Rampant inflation can be a difficult thing to manage, and the good news is that it won't last forever. But it's hard to predict when living costs will start to shrink. If you're struggling right now, it pays to see if borrowing against your home is a viable option.