How your home equity is affected by home prices (and why now is a good time to borrow)

The housing market has been a rollercoaster throughout the past few years, and it's not likely to slow down anytime soon. Elevated mortgage rates, a looming recession and fluctuating home prices are keeping both buyers and sellers on their toes.

After years of continuous growth, home values could be starting to decline. According to the latest data from the National Association of Realtors, home prices moved upward in about 70% of metropolitan areas across the country in the first quarter of 2023, while around 30% of metro areas saw home prices drop. Recent data from S&P CoreLogic Case-Shiller Indices shows that prices are strongest in the Southeast and weakest in the West.  

Below, we'll break down how today's housing prices can affect your home's equity — and why it may be a good time to start tapping into it.

Start exploring your home equity options here now.

How home prices affect your home equity

Even if you're not looking to sell your house, you can benefit from knowing its market value. 

That's because the value of your home today can affect how much equity you may be eligible to borrow from it. Home equity is determined by your home's current market value and how much you've paid toward your principal via mortgage payments.

For example, say you bought your home for $300,000. Over the past few years, not only have you paid down $50,000 of that initial mortgage, but your home has also increased in value to $400,000. That means the equity you've built up in your home today is equal to $150,000 (the amount you've paid plus the increase in value).

However, the opposite can be true too. In the future, if your home value falls below the price you paid for it, and you owe your mortgage lender more than the home is worth, you could end up with negative equity. 

Now is a good time to use your home's equity

If you're in an area where home prices are still high, you could benefit from tapping into your home equity now.

If you're planning a home renovation to increase your home's value or you have high-interest debts you want to consolidate, taking advantage of a home equity loan or home equity line of credit (HELOC) can be a good option.

These loans generally carry better interest rates than you'll find with personal loans or credit cards, and you may even qualify for tax deductions if you use them to improve your home. However, they also require an added amount of responsibility because your loan is secured by your home's value.

"With a home equity loan or HELOC, the lender can force you to sell your home to pay the debt if you miss your payments," says Keith Spencer, CFP, founder of Spencer Financial Planning. "You're putting your home at risk if you can't make the payments. Many other forms of debt are unsecured, and the lender has fewer options for recourse if you can't pay the debt.

In addition to home value fluctuations, interest rates are another factor to consider. 

The Federal Reserve just moved interest rates up for the tenth consecutive time, which means the cost of borrowing will soon get even more expensive. While home equity loans and HELOCs carry much better interest rates than other loan types, they can still be affected by higher rates. Locking in a good rate sooner rather than later can save you a lot of money over the lifetime of the loan. 

Learn more about your home equity options now.

The bottom line

When home prices rise, homeowners can benefit from the increased value of the investment they've made in their homes. But when home values are on the decline, things can get a bit more complicated. If you're concerned that home prices in your area could soon be at risk, you may want to consider whether a home equity loan or HELOC is right for you. 

The relatively low rates and potential tax advantages these products offer could help you get started on a renovation or repair that can help keep your home value high — no matter future market conditions.