Good reasons not to tap your home equity right now

Soaring real estate values mean many homeowners are awash in equity — the difference between what they owe and what their homes are worth. The average-priced home is up 42% since the start of the pandemic, and the average homeowner with a mortgage can now tap over $207,000 in equity, according to Black Knight Inc., a mortgage and real estate data analysis company.

Spending that wealth can be tempting. Proceeds from home equity loans or lines of credit can fund home improvements, college tuition, debt consolidation, new cars, vacations — whatever the borrower wants.

But  one risk of such borrowing should be pretty obvious: You’re putting your home at risk. If you can’t make the payments, the lender could foreclose.

Also, as we learned during the Great Recession of 2008-2009, housing prices can go down as well as up. Borrowers who tapped their home equity were more likely to be “underwater” — or owe more on their houses than they were worth —  according to a 2011 report by CoreLogic, a real estate data company.

Other risks are less obvious but worth considering.

You may need your equity later

Many Americans aren’t saving enough for retirement and may need to use their home equity to avoid a sharp drop in their standard of living. Some will do that by selling their homes and downsizing, freeing up money to invest or supplement other retirement income.

Other retirees may turn to reverse mortgages. The most common type allows homeowners 62 and up to convert home equity into a lump of cash, a series of monthly payments or a line of credit they can use as needed. The borrower doesn’t have to pay the loan back as long as they live in the home, but the balance must be repaid when the borrower dies, sells or moves out.

Another potential use for home equity is to pay for a nursing home or other long-term care. A semiprivate room in a nursing home cost a median $7,908 per month in 2021, according to Genworth, which provides long-term care insurance. Some people who don’t have long-term care insurance instead plan to borrow against their home equity to pay those bills.

Clearly, the more you owe on your home, the less equity you’ll have for other uses. In fact, a big mortgage could preclude you from getting a reverse mortgage at all.

You’re deeply in debt

Using your home equity to pay off much higher-rate debt, such as credit cards, can seem like a smart move. After all, home equity loans and lines of credit tend to have much lower interest rates.

If you end up filing for bankruptcy, though, your unsecured debts — such as credit cards, personal loans and medical bills — typically would be erased. Debt that’s secured by your home, such as mortgage and home equity borrowing, typically isn’t.

What you’re buying won’t outlive the debt

It’s rarely, if ever, a good idea to borrow money for pure consumption. Ideally, we should only borrow money for purchases that will increase our wealth: a mortgage to buy a home that will appreciate, for example, or a student loan that results in higher lifetime earnings.

Home equity loans typically have fixed interest rates and a fixed repayment term of anywhere from five to 30 years. The typical home equity line of credit, meanwhile, has variable rates and a 30-year term: a 10-year “draw” period, where you can borrow money, followed by a 20-year payback period. You typically are required to pay only interest during the draw period, which means your payments could jump substantially at the 10-year mark when you start repaying the principal.