How to Get Equity Out of Your Home

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Your home is more than just a place to eat, sleep, and raise kids—it also is an investment, which means it appreciates in value.

The value of this increase is what is called “equity.” You probably have a lot more equity in your home than you did five years ago.

Are you wondering how to calculate home equity or how much equity do I have in my home?

As a homeowner, you possess several avenues to access the equity in your home. These options include various types of home loans, such as cash-out refinances, home equity loans, and home equity lines of credit (HELOC).

The amount of tappable home equity is currently approaching record levels. According to CoreLogic, U.S. homeowners with mortgages collectively gained approximately $3.6 trillion in home equity year over year during the second quarter of 2022. This marked an impressive increase of 27.8 percent.

Given this situation, it might be an opportune moment to consider leveraging your home’s equity to access cash at a relatively favorable interest rate.

This article explains what is equity on a house and explores the various methods to get equity out of your home, providing you with a roadmap to unlock the hidden value in your property.

What Is Home Equity?

Home equity is the portion of your property’s value that you truly own, representing the difference between your property’s fair market value and the outstanding mortgage balance.

It is a valuable asset that can be tapped into for various financial purposes.

How to Calculate Your Home Equity

To estimate your home equity, subtract your outstanding mortgage balance from your home’s current market value.

This figure provides a clear understanding of the wealth you’ve built in your property over time.

If, for example, you owe $560,000 on your mortgage and your house is worth $800,000, then you have $240,000, or 30 percent equity in your home.

It takes most homeowners about five to 10 years to build up 15–20 percent of home equity.

How to Get Equity Out of Your Home: Most Common Methods

Unlocking your home’s equity and turning it into cash for such purposes as settling medical bills, consolidating debt, or doing home renovations and remodeling is achievable through several methods.

Here are some of the most common approaches:

1. Home Equity Loans

Home equity loans, also known as second mortgages, allow you to borrow a lump sum of money using your home as collateral. This method provides a fixed interest rate and predictable monthly payments.

If you take a home equity loan, you will make two monthly payments: your home equity payment and your existing mortgage payment.

When it comes to a home equity loan, the beauty lies in its versatility, as there are no stipulated restrictions on how you can utilize the funds. However, it’s important to note that there will be associated closing costs, typically ranging from around 2–5 percent of the loan amount.

Most lenders are generally willing to extend a loan up to a combined 80 percent of your home’s total value, encompassing both your existing mortgage and the new home equity loan. Repayment terms range from five to 30 years.

2. Refinancing Your Home

Refinancing your home involves replacing your current mortgage with a new one that has more favorable terms.

This can help you access equity while potentially securing a lower interest rate, implying that you will maintain consistent and predictable payments during the duration of your loan. Even if interest rates follow their anticipated upward trend, your personal rate will remain unchanged.

With a cash-out refinance, you can usually secure a new mortgage amounting to 80–85 percent of your home’s current value.

Similar to a traditional mortgage, you should expect to incur closing costs averaging around 2–5 percent. Like other home equity options, you have the flexibility to utilize the funds for a wide range of purposes.

3. Home Equity Line of Credit 

A HELOC works like a credit card, letting you borrow against your home’s equity as needed. This revolving line of credit offers flexibility in accessing funds for various expenses. You have the option to make multiple withdrawals over time rather than receiving a single lump sum. And unlike the above-discussed forms of secondary home loans, HELOCs typically come with no closing costs.

However, it’s important to note that your loan will come with a variable interest rate. This may not be the most favorable option in today’s climate of rising interest rates, as your personal rate is likely to increase in response to changing market conditions.

Similar to home equity loans, HELOCs introduce a second monthly payment obligation. However, it’s worth noting that during the initial draw period, you might only be required to make interest payments. Once you transition into the repayment period, which typically occurs after about 10 years, your monthly payments will increase. In certain situations, you might even be required to repay the entire outstanding balance at that point, commonly referred to as a balloon payment.

4. Other Methods

Additional methods to access home equity include shared appreciation agreements.

Through a home equity sharing agreement, an investor acquires a stake in your home’s equity and provides you with a one-time payment. This essentially entails the investor investing in a portion of your home’s potential future value. When you decide to sell your home, refinance, or when the agreed-upon term concludes, you have the option to buy out the investor’s share. Additionally, in certain situations, you may be required to repay the initial investment.

Pros and Cons of Getting Equity Out of Your Home

Before tapping into your home equity, it’s essential to weigh the advantages and disadvantages.

While accessing funds can be beneficial for various financial goals, it also comes with responsibilities and potential risks.

Pros

• Access to funds. Provides a source of funds for various financial needs, such as paying for a major life expense, home improvements, debt consolidation, or investments.
• Lower interest rates vs. other loan options. HELOCs and home equity loans generally offer lower interest rates when compared to other forms of borrowing, such as personal loans or credit cards.
• Your interest payments may be tax-deductible. In some cases, the interest paid on home equity loans or HELOCs may be tax-deductible, providing potential tax benefits.
• You can use the money for virtually any purpose. Home equity can be used for various purposes, offering financial flexibility and the ability to achieve different financial goals.
• Fixed or variable rates. Home equity loans offer fixed interest rates, providing predictability, while HELOCs offer variable rates, potentially leading to lower initial costs.
• Improving your home. Using equity for home improvements can increase your property’s value and enhance your living space.
• Debt consolidation. Using equity to consolidate high-interest debts can simplify payments and potentially reduce overall interest costs.

Cons

• Interest costs. Depending on the method you choose, you may incur interest costs on the borrowed funds, increasing the overall expense.
• Your home is used as collateral. Failing to repay a home equity loan or HELOC could put your home at risk of foreclosure, as it serves as collateral.
• You’ll pay upfront fees and closing costs. There may be fees associated with obtaining a HELOC or home equity loan, including appraisal fees, origination fees, and closing costs.
• The risk of negative equity. Your home’s market value can fluctuate, affecting the amount of equity available and the risk associated with borrowing against it.
• Potential overspending. Access to a large sum of money may lead to overspending or using the funds for non-essential purchases.
• Responsible repayment. Low rates are great, but failing to repay the borrowed money can lead to financial strain and negatively impact your credit score.
• Reducing homeownership stake. When you take out any type of home equity loan, your home is on the line. Accessing equity reduces your ownership stake in your home, which may impact your long-term financial security.

Please note that the decision to access home equity should be made carefully, considering your specific financial circumstances, goals, and the terms and conditions of the chosen method. It’s advisable to consult with a mortgage specialist or financial advisor before proceeding.

How to Choose the Right Home Equity Option

Selecting the right home equity option depends on your risk tolerance, current mortgage terms, and your specific financial needs.

For instance, a minor bathroom renovation might only necessitate $10,000 and a two-month timeframe. Conversely, to cover four years of college tuition expenses totaling $200,000, you’ll require a substantially larger loan amount with an extended repayment period.

• If you prefer gradual access to your funds while keeping costs in check, think about opting for a HELOC.
• If you need a single lump-sum payment, a home equity loan is the way to go. Just remember that this approach entails managing two mortgage payments, which can be challenging.
• If your priority is stability, a cash-out refinance may be your best bet. It allows you to retain your existing mortgage rate throughout the loan’s duration.

Given the diversity of lenders offering different rates and terms, it’s essential to conduct thorough research and compare options diligently to secure the most advantageous deal tailored to your unique financial circumstances.

How to Improve Your Home Equity

Boosting your home equity involves paying down your mortgage consistently and on time, making home improvements to improve the value of your property, and staying informed about your property’s market value. Increasing equity can provide more financial flexibility.

Plan Action After Choosing a Home Equity Option

After choosing a home equity option, create a financial plan outlining how you’ll use the funds wisely. Whether it’s for home improvements, debt consolidation, education, or other purposes, a well-thought-out strategy is essential.

How to Get Equity Out of Your Home: Key Takeaways

In summary, understanding how to calculate home equity and access it can be a valuable financial asset.

Whether you choose a home equity loan, refinancing, a HELOC, or another method, careful consideration is crucial.

Hopefully, you now have answers to questions such as, “What is equity on a house?” and “How much equity do I have in my home?”

By making informed decisions and utilizing your home equity wisely, you can achieve your financial goals and improve your overall financial well-being.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.