Want to Borrow Against Your Home? It Pays to Get Moving ASAP

You may want to tap your home equity while you still have more of it.

When you need money, whether to renovate your home or for another reason, you have different options for accessing it. You could take out a personal loan or even charge up a balance on a credit card. But a far more affordable means of borrowing could be to tap your home equity.

Home equity is defined as your home's market value minus your mortgage balance. If your home is worth $400,000 and you owe $200,000 on your mortgage, it leaves you with $200,000 in equity, which you can borrow against via a home equity loan or line of credit (HELOC).

Meanwhile, earlier this year, home equity levels reached a record high of $11.5 trillion during the second quarter. But new data from Black Knight reveals that home equity levels may have already peaked in May, and may now be slowly but surely dipping downward. And so if you've been thinking of taking out a home equity loan or HELOC, you may want to get moving sooner rather than later -- while you still have a healthy amount of equity to tap.

The upside of borrowing against home equity

There are two major benefits to taking out a home equity loan or HELOC. First, as long as the equity in your property is there, they're fairly easy to qualify for.

Both home equity loans and HELOCs are secured by your home itself. As such, you might manage to qualify for one even if your credit score needs work. That's because, in a worst-case scenario, your lender could always force the sale of your home to get repaid.

Along these lines, you may find that a home equity loan or HELOC is a more affordable means of borrowing than other options, like personal loans. Personal loans are unsecured, meaning they're not tied to a specific asset. And so the lenders that issue them take on more risk, which tends to translate into higher borrowing rates.

The downside of borrowing against home equity

A home equity loan or HELOC represents a sum of money you've borrowed and need to pay back. And that alone is something to consider carefully, because having debt payments hanging over your head could make for a stressful financial situation.

Plus, even though home equity loans and HELOCs tend to charge competitive interest rates, you'll pay interest nonetheless. And so you may want to keep your borrowing to a minimum to avoid racking up a lot of interest.

Finally, if you fail to keep up with your home equity loan or HELOC payments, you could end up losing your home. That's a scary thing, to say the least.

Should you borrow against your home -- and soon?

If you've run the numbers and are convinced you can manage home equity loan or HELOC payments, then doing so could give you access to money in an affordable manner. But if you're going to go this route, you may want to apply sooner rather than later.

As home values slowly decline, equity levels are apt to follow suit. And so you may have more borrowing options now than you will in, say, six months.

Plus, we don't know if interest rates will continue to rise as the Federal Reserve does its part to combat inflation. While interest rates aren't at a low right now, at least you know what you're dealing with. It's hard to say what rates will look like next year, so if you'd rather not risk a huge set of increases, you may want to apply for your home equity loan or HELOC this month.