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Is it smart to borrow home equity in today's economy? Experts weigh in

A home equity loan can help finance major home repairs and renovations. Mint Images/Getty Images

If you're a homeowner, increased home prices across the country combined with rising interest rates, may have you considering the benefits of borrowing from your home equity.

Home equity loans and home equity lines of credit (HELOCs) allow homeowners to borrow from the value they've built up in their homes. That equity is the difference between your current estimated home value and how much you've paid toward your mortgage. Because home equity loans or lines of credit are secured by your home, they often come with lower interest rates than alternatives, such as credit cards and some personal loans.

Even still, you're likely to pay more in interest than you would have when rates are lower, and given today's overall economic uncertainty, you might be wondering whether it's a good idea to take on any debt. Below, we'll outline three things that may help you decide.

Thinking about using home equity today? Find the best rates you can qualify for now.

Should you borrow from home equity in today's economy?

Here are a few factors that might influence your choice to use a home equity loan or HELOC today.

Interest rates

One of the biggest benefits of home equity loans and HELOCs today is the competitive interest rate you can score compared to other borrowing options. Top home equity rates can be as low as 7%-8% APR. By comparison, some personal loan rates for the most creditworthy borrowers may start in that range but go up to double digits, while credit cards regularly charge upwards of 20% APR on balances. 

"When compared to other forms of credit, borrowing against your home's value will likely always be advantageous," says Shawn Ballinger, CFP, founder of Columbus Street Financial Planning. 

If you're looking to score the best rate you can today? "Maintaining a loan-to-value ratio of less than 80% will ensure you'll receive the most competitive rates," Ballinger also recommends. "And stick with major or regional established banks when looking for a home equity loan or line of credit product." 

Online divisions of these banks can be a great place to start your search. Make sure you practice good habits to improve your score before you apply, and always shop around before deciding on a lender. You may get approved for different rates and terms, so it's always beneficial to compare what you can qualify for.

Start exploring home equity rates you can qualify for today here.

Home values

An advantage for homeowners today is the rate at which home values have grown over the past few years. That growth may be showing signs of slowing, but many are sitting on large amounts of equity — especially relative to what they purchased their homes for initially. 

Even if those boosted values are a short-lived benefit of today's economy, you may want to take advantage of them to increase your home's value for the long term. 

If you're considering using home equity for a home renovation or remodel, you'll get another benefit over other borrowing options, since the interest on your loan is tax deductible when used for these eligible purposes. Plus, if you choose a project designed to improve your home for future buyers, you can preserve its value and potentially benefit even more in the long run when you're ready to sell.

Preparing for the future

There's a lot of uncertainty about what the economy could look like over the next year. The Fed has signaled it may be ready to pause its rate hikes, even if rates will remain high. And Fed officials as well as economists have predicted a recession in the coming months

While taking on more debt in general can be a risk, you could benefit from securing a relatively low rate today — especially when the future is unclear.

"It's a good idea to have many levers at one's disposal for borrowing options, particularly now that credit has become tighter," says Mike Biggica, CFP, founder of Pixel Financial Planning. "If your roof suddenly needs a repair, and you were recently laid off, you'll be happy that you applied for that HELOC earlier in the year to avoid credit card debt." 

Another thing to consider is whether a fixed-rate home equity loan or a variable-rate HELOC fits best with your outlook. Some borrowers may prefer fixed rates, since there's a chance rates could still rise in the future. For others, however, variable rates may be better — the long repayment timeline could mean you'll pay less over the long run when rates eventually go down.

Find out what rates you can qualify for using different home equity options here now.

The bottom line

Taking on debt when interest rates are high and a potential economic downturn looms can be a difficult decision. While it may not be the right time for every homeowner, some may have a lot to gain by borrowing from their home equity today. Not only do home equity loans and HELOCs offer the chance to potentially score a lower interest rate, but they can help you preserve your home's value when used toward renovations and may also be a good way to avoid higher-interest debts in the future. 

Before you decide, consider how an added payment might fit within your overall financial plan and budget and whether a fixed or variable interest rate makes more sense for you. And don't forget to compare different lenders to qualify for the best rate possible

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