How to Get Equity Out of Your Home
November 11, 2023 5-minute read
Author: Joel Reese
Your home is more than just a place to live, sleep and binge the latest true-crime documentary series.
It’s also an investment, which means it — theoretically — increases in value. The value of this increase, known as “equity,” doesn’t just exist on paper — it’s possible to use this capital for longer-term projects or events that require larger amounts of money.
Which raises the question: How do you get equity out of your home?
The best ways to get equity out of your home are through home equity loans, home equity lines of credit (HELOCs) and cash-out refinancing. Accessing your home equity can be a lower-cost way to borrow money for things like school tuition, paying off debts or home renovations.
What’s Home Equity?
To put it simply, home equity is the amount of your home that you actually own. Specifically, equity is the difference between what your home is worth and what you owe your lender.
As you make payments on your mortgage, you reduce your principal — the balance of your loan — and you build equity. Once you have enough equity built up, you can access it by taking out a HELOC, a home equity loan or by using a cash-out refinance.
Taking out a loan on your home equity can provide funds for costs such as medical bills, college tuition, home improvements or other reasons. It also allows you to consolidate your debts at a lower interest rate, and the interest you pay may be tax-deductible if you use the funds to make improvements to your home.
How To Determine The Equity In Your Home
Once you’ve determined you want to access your home equity, the next step is to determine how much money is available. Your lender can tell you the balance left on your mortgage principal.
Next, estimate how much your home is worth. This is an inexact science, so one place to start is by looking at the sale prices of similar homes that have sold near you. Then, simply subtract your loan balance from your estimated home value.
For example, say you owe $100,000 on your mortgage and you believe your home is worth $180,000. Simply subtract $100,000 from $180,000. Voila: You have an estimated $80,000 in equity in your home.
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How To Pull Equity Out Of Your Home
There are different methods you can use to access your home equity. These include a HELOC, a home equity loan or a cash-out refinance.
Home Equity Line Of Credit (HELOC)
A HELOC is a type of second mortgage that allows homeowners to borrow money against the equity they have in their home and receive that money as a line of credit. Borrowers can use HELOC funds for a variety of purposes, including home improvements, education and the consolidation of high-interest credit card debt.
Pros And Cons Of HELOCs
As you might expect, there are pros and cons to taking out HELOC funds. One advantage is that they allow you to borrow over time, so you’re only taking the funds you need. This can help keep your monthly payments lower and help avoid unnecessary debt (and interest payments).
On the other hand, they can be expensive. You may be required to pay an application fee and attorney fees, in addition to conducting a title search and a home appraisal. Also, your home is the collateral in these situations, and you could end up losing your place of residence if you find yourself unable to make payments on your HELOC.
You also need to keep an eye out for potential rate increases based on market fluctuation. If your rate goes up, or your draw period ends and you must go from making interest-only payments to full payments, that could add a substantial amount to your monthly payments.
Rocket Mortgage® does not currently offer HELOCs.
Home Equity Loan
A home equity loan enables you to use the equity you’ve built in your home as collateral to borrow money. These types of loans are often called second mortgages because they create another loan payment on top of your primary mortgage.
Home equity loans are similar to HELOCs in that they both allow you to access your home’s equity, but a HELOC functions more like a credit card while a home equity loan provides you with cash in one lump sum payment.
Pros And Cons Of Home Equity Loans
On the positive side of the ledger, a home equity loan is more affordable than a personal loan and comes at a fixed rate — unlike a HELOC, which often comes with an adjustable or variable rate that can change every month.
Home equity loans also tend to have lower interest rates than credit cards, which make them more affordable in the long term.
On the downside, however, taking out a home equity loan means you will have two mortgage payments. Also, the interest rate for a home equity loan is higher than a cash-out refinance, and the holder of your primary mortgage gets paid first in a foreclosure if you stop making mortgage payments. As a result, home equity loans are considered riskier for lenders.
A cash-out refinance essentially gives you cash in exchange for taking on a larger mortgage. In other words, you borrow more than you owe on your current mortgage and pocket the difference.
Unlike when you take out a second mortgage, a cash-out refinance doesn’t add another monthly payment to your list of bills — you simply pay off your old mortgage and replace it with the new mortgage.
Pros And Cons Of A Cash-Out Refinance
Some people are interested in cash-out refinancing because it sets a definitive mortgage payment and keeps it at that level. That’s not the case with some of the other options, which can carry variable — rather than fixed — rates.
On the other hand, your overall debt load will increase and you will have to pay closing costs — just like you did with your original mortgage. Also, lenders often require that you maintain at least 20% equity in your home after a cash-out refinance.
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Why Take Equity Out Of Your Home?
People often refer to their homes as investments, but any appreciation can seem solely theoretical, rather than liquid. Taking out home equity allows you to use the equity your home has accumulated to pay for home renovations, college tuition, emergency costs, debt consolidation or other outlays.
Which Home Equity Method Is Right For You?
Determining which method of accessing home equity can be a complicated decision — and one that shouldn’t be made lightly. Whichever method you choose, keep in mind the costs and benefits of each one.
- If you want to access your money a little at a time (thereby keeping potential costs lower), consider a HELOC.
- If you want a lump sum payout, a home equity loan will provide that for you. Keep in mind that this method means you’ll have two mortgage payments, which can be daunting for some.
- If you’re looking for a method that will provide security, consider a cash-out refinance, which will allow you to maintain your current mortgage rate for the life of the loan.
The Bottom Line
Life can be expensive, and surprise costs can come out of nowhere. Accessing your equity allows you to take advantage of your home as an investment and address such situations. If you decide this is something you’d like to pursue, you can access your home equity by applying for a home equity loan with Rocket Mortgage.
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