WHEN YOUR HOUSE IS ALSO YOUR BANK

You can use home equity to pay off high-interest debt or improve your home, but it’s important to understand the risks.

- BY EMMA PATCH

IF you’ve owned your home for a while, odds are you are sitting on a lot of home equity. At the end of the third quarter of 2024, the average homeowner with a mortgage had $319,000 of equity in their home, according to Intercontinental Exchange (ICE), a technology and data provider. Of that amount, an average of $207,000 was “tappable”—the amount lenders will allow a homeowner to borrow while maintaining a 20% equity stake in their home.

With a home equity loan or a home equity line of credit (HELOC), you can draw on your equity for just about anything—to fund your business, pay off high-rate debt or update your home, to name a few (see the story on page 66 for information on using home equity to finance a solar power system). And because home equity loans and HELOCs are secured by your home, they typically come with lower interest rates than credit cards or personal loans. But before you pull the trigger, it’s smart to evaluate your options—and to be aware of the risks that come with borrowing against your home’s value.

HOW IT WORKS

Home equity loans provide a single lump-sum disbursement, typically at a fixed rate that recently averaged 8.4%, according to Bankrate. In most cases, you start making monthly payments to repay principal and interest on the loan right away, and the repayment period can range anywhere from five to 30 years.