Home Values Are Dropping. Will You Struggle to Get a Home Equity Loan in 2023?

Your home might be worth a little less than it was a year ago, but that doesn't mean a home equity loan will be out of reach.

In 2021, U.S. property values surged as low mortgage rates led to an uptick in buyer demand. The market started to cool during the latter part of 2022. And now, home prices are down a bit compared to a year earlier.

Redfin reports that the typical U.S. home sold for $350,246 during the four weeks ending Feb. 26, 2023. That's a decline of 0.6% from a year prior, and it also marks the first annual drop since 2012.

Of course, falling home values might be a problem for those looking to sell this year. But will they be a problem for homeowners seeking to borrow against their home equity?

A home equity loan might still very much be in reach

If you have a need for money, you might have several borrowing options. One might be to take out a personal loan, which lets you use your loan proceeds for any purpose. Another option is to borrow against the equity you have in your home. And the benefit of going that route is that you might qualify for a more competitive interest rate on a home equity loan than on a personal loan.

Home equity loan lenders take on less risk than personal loan lenders. That's because personal loans are unsecured, which means they aren't backed by a specific asset -- whereas home equity loans are secured by the properties whose equity is being tapped. If a borrower fails to repay a home equity loan, the lender can, eventually, force the sale of their home to be made whole.

Because U.S. home values are dropping, you may be wondering if a home equity loan will still be an option for you this year. The answer clearly depends on how much equity, if any, you're sitting on. But it's important to realize that despite the aforementioned drop, a lot of homeowners still have plenty of equity in their properties. So all told, you may find that this borrowing option is more than accessible to you in 2023, even if home values drop further.

Should you take out a home equity loan?

There are benefits to borrowing money with a home equity loan, like potentially snagging a competitive interest rate on the sum you borrow. But it's also important to understand the risks involved. If you fail to repay your loan, you could wind up losing the home you worked so hard to purchase and maintain. It's that simple.

Even if things don't reach that point, falling behind on any loan could cause a world of damage to your credit score. So either way, if you're going to take out a home equity loan, make sure you can work your monthly payments into your budget with ease. If you're worried those payments will be a stretch, hold off on taking out that loan.

You should also know that while home values may be down right now, borrowing costs are up on the heels of the Federal Reserve's recent string of interest rate hikes. So a home equity loan may not be as affordable this year as you might've expected one to be.