Everything You Should Know About Home Equity in 2023

August 3, 2023

The home equity landscape has changed dramatically. Home equity has surged in the past five years, but interest rates have risen since March 2022. As such, those who bought homes before rates increased may find they can borrow against their home value sooner — but current rates are also causing borrowers to hesitate.

There are several factors to consider about your home’s equity in 2023: you may have earned more equity faster, but you may think you have fewer ways to leverage it when necessary. That’s not necessarily the case. Here’s what you need to know.

Understanding What’s Changed in 2023

The 2023 housing market is complex: homes are still in demand from buyers, but homeowners may be averse to selling, particularly if they want to move into a bigger or more expensive home. A high-interest environment can make it more challenging for buyers, sellers and homeowners who want to tap into their home equity.

Interest rates are higher than they’ve been in years, which has a dampening effect on the market. Homeowners face significantly higher mortgage interest rates than they enjoy on their current home loan. Getting a mortgage for a new home, or refinancing a current mortgage isn’t as enticing as it was a year ago.

Home buyers are also more reluctant to enter the housing market. High interest rates, in addition to the competitive nature of home-buying at present, have some would-be buyers sitting on the sidelines until conditions improve — or at least stabilize.

“Borrowers are averse to the current rate environment. They’ve seen rates go up so much during the past 12 months that some are hesitant to take out loans,” says Tim Holman, vice president and director of Mortgage Operations at Northwest Bank.

What this Means for Your Home Equity in 2023

The last five years have seen significant growth in home equity. A hot market, paired with a sustained lack of houses for sale, has helped create a three-year surge in value. This means that borrowers have more equity in their homes to borrow against, and this could help you take out a loan or line of credit for a project faster than you expected.

That said, higher interest rates make both refinancing and new home mortgages less attractive. “The interest rate environment in 2020 was much different,” says Tony Pellegrino, vice president of Consumer Direct Lending at Northwest Bank. “Homeowners looking to turn equity into cash turned toward cash-out refinancing.”

A cash-out refinance swaps your home loan for a new and larger loan. In a low-interest environment, cash-out refinancing was a solid option for turning equity into liquid assets. Higher interest rates have made this a less attractive option.

“Borrowers looking to get cash out through the equity in their home have turned to a home equity loan product to do so,” Holman says. With mortgage rates at recent record levels, you have to get creative when unlocking the borrowing potential of your home equity.

Current Strategies for Tapping into Home Equity

Even though there are few signs of lower interest rates to come, borrowers still have options when it comes to tapping into the equity of their homes. Whether you’ve owned your home for 20 years or three, there are ways to turn your equity into cash. Here’s the current state of affairs when it comes to borrowing against the equity in your home.

Assess Your Equity Today

The last three years have seen a unique, rapid increase in home equity. It’s likely that you have more equity than you think — especially if you bought your home in that timeframe.

“Some people think that there’s no way they have equity in their house because they only bought it last year. In fact, you may have a significant amount of equity in it due to how much appreciation has happened in recent years,” Holman says.

The ways in which homeowners can leverage their equity vary. Some have distinct advantages in the current housing market, while other options in a high-interest market do not.

Reconsider Refinancing

Cash-out refinancing was more enticing in a low-interest environment. Turning equity into liquidity through a new mortgage made more sense when interest rates hovered near zero. Now, interest rates are much higher, and what you’d get out of a cash-out refinance is a fraction of the value it would have had a year ago.

The Advantages of a Home Equity Line of Credit (HELOC)

There’s good news for homeowners looking to tap into their equity in spite of a high-interest borrowing environment. A home equity line of credit (HELOC) is an increasingly popular option as it offers a revolving line of credit rather than a lump-sum loan. You only pay interest on the amount borrowed against your HELOC, which provides a low payment option to borrow the money.

“A 30-year mortgage takes a lot of time to build equity. But if you bought a home in the last couple of years, the increase in home values can help you tackle projects sooner than anticipated,” Pellegrino says.

Broaden Your HELOC Horizons

You’re not limited to home improvement projects with a HELOC — you’re simply borrowing against the equity you have in your home. This means you can use HELOC funds for a variety of expenses during the life of the line of credit.

The primary use of a HELOC might be for home improvements, but you can also use it to consolidate high-interest debt. Credit card rates are often higher than a HELOC interest rate, meaning it could make sense to pay off these debts through a line of credit. This has the potential to save you money on interest payments, depending on your own financial situation.

Alternatively, you may want to use your HELOC to finance an expensive purchase, such as a car or appliances. Borrowers may even turn to a HELOC to help pay for higher education expenses in a pinch. Many use their HELOC as a way to access emergency funds, since the loan approval process is typically faster.

No matter how you access your home’s equity, be sure you have a solid financial plan in place. Speak with a financial professional, like a Northwest banker, before you consider opening a HELOC, as well as any other major borrowing or loan-related decision.