Will home equity loans get more expensive in 2023?

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They could – and they could also be harder to qualify.

Key points

  • Borrowing against home equity can be an affordable way to get a loan.
  • But because borrowing costs are likely to rise next year, home equity loans could become more expensive.
  • If home values ​​drop and homeowners lose their equity, it could also be more difficult to qualify for a home equity loan.

Owning a home has many advantages. Not only do you get the stability of predictable monthly mortgage payments (assuming you have a fixed rate loan), but you can also set your own rules instead of having to listen to a landlord.

Owning a home also means being able to borrow against the equity you have built up in it. Home equity is defined as the market value of your property minus your mortgage balance. For example, if your home can sell for $500,000 and you owe $200,000 on your mortgage, you have $300,000 in equity left.

Right now, homeowners are sitting on high levels of equity because property values ​​are rising nationwide. So you might think it’s a good idea to borrow against your home, whether it’s to finance a renovation, go on vacation, or for some other reason.

But while home equity loans may be affordable, there’s a good chance they’ll get more expensive in 2023. Here’s why.

Borrowing rates could rise across the board

American consumers have been struggling with inflation since the end of 2021. And the Federal Reserve is trying to step in and do something about it, which is to keep raising interest rates.

The logic is that as borrowing becomes more expensive, consumers are likely to spend less. Once that happens, supply chains should be able to catch up with consumer demand and prices should start to retreat to more subdued levels.

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While the Fed may have good intentions, an unintended consequence of continued rate hikes is that borrowing could become prohibitively expensive for consumers. And while you’ll generally pay less interest on a home equity loan than on, say, a credit card balance, if rates universally rise next year, a home equity loan could cost more than intended. As such, it’s fair to say that 2023 may not be the best year to borrow against your home.

Qualifying could get trickier

Typically, home equity loans are fairly easy to get when the equity in your home is there. But as home values ​​begin to fall (which is likely to happen in 2023), equity levels are likely to decline. And though that doesn’t mean you’ll be left Nope if that happens, you could end up with a lot less.

So if you’re seriously considering borrowing against your home’s equity, you may want to do so as soon as possible. If you wait too long, you may find that a home equity loan is less affordable. Additionally, you may find that you are not able to borrow as much as you would like because your capital level has dropped.

But you don’t want to rush into a home equity loan either. If you borrow too much, to the point that you can no longer make your payments, you risk losing your home. And that’s a really terrible consequence that you’ll want to avoid.

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