How to get equity out of your home

Your home is more than just a place to relax, sleep and eat. It’s also an investment, which means that – at least in most cases – it will increase in value. The difference between your home’s value and the amount you still owe your mortgage lender is known as “equity,” but it doesn’t just exist on paper. Rather, it’s possible to use this capital for longer-term projects or events that require larger amounts of money.

So, this raises an important question: How do you get equity out of your home?

Typically, the best way to get equity out of your home is through a home equity loan, a home equity line of credit (HELOC) or a cash-out refinance. Accessing your home equity can be a lower-cost way to borrow money for items and endeavors such as school tuition, paying off debts and making home renovations.

Determining how much equity you have available

If you’ve determined you want to tap into your home equity, the first step in taking equity out of your home is finding out 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 isn’t an exact science, so one place to start is by looking at the sales prices of similar homes that have sold near you. Then, to calculate your home equity, simply subtract your loan balance from your estimated home value.

For example, suppose you owe $100,000 on your mortgage and you believe your home is worth $180,000. Just deduct $100,000 from $180,000. That leaves you with an estimated $80,000 in home equity.

Keep in mind, however, that you likely won’t be able to use all of your equity. Most lenders and loan programs allow borrowers to only take out 80% or 85% of the equity they have available. 

How to pull equity out of your home

Is a HELOC, home equity loan or cash-out refinance the best option for you and your need for thousands in quick cash? Before making this determination, it’s important to understand each of these popular borrowing options and how they work.

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 various purposes, including home improvements, education and consolidating high-interest credit card debt.

Pros and cons of a HELOC

As you might expect, taking out HELOC funds comes with pros and cons. One advantage of a HELOC is that it allows you to borrow over time, so you’re only taking the funds you need. This can help you keep your monthly payments lower and avoid unnecessary debt (and interest payments).

On the other hand, a HELOC can be expensive. You may be required to pay an application fee and attorney fees, in addition to conducting a title search and getting a home appraisal. Also, your home is your collateral here, and you could end up losing your place of residence if you can’t make timely 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 switch from making interest-only payments to making full payments, you’ll be paying out a lot more each month.

Rocket Mortgage^® doesn’t currently offer HELOCs.

Home equity loan

Like a HELOC, a home equity loan lets you use the equity in your home as collateral to borrow money. Also like a HELOC, a home equity loan is a type of second mortgage because it leaves you with another loan payment on top of your primary mortgage (assuming you haven’t already paid the primary mortgage off).

A HELOC functions in a fashion that’s similar to a credit card, however, while a home equity loan provides you with cash in one lump-sum payment.

Pros and cons of a home equity loan

On the positive side of the ledger, a home equity loan will feature a lower interest rate than a personal loan and usually comes with a fixed interest rate – unlike a HELOC, which typically comes with an adjustable or variable rate that can change frequently.

Home equity loans likewise tend to have lower interest rates than credit cards, making them more affordable long term.

On the downside, a home equity loan most often means juggling two mortgage payments. Also, the interest rate for a home equity loan is typically higher than you’ll find with 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, lenders generally consider home equity loans to be risky.

Cash-out refinance

A cash-out refinance 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. Instead, 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 a HELOC since it usually carries a variable rate rather than a fixed rate.

On the other hand, your overall debt load will likely increase with a cash-out refinance, and you’ll 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. This limits how much cash you can take out and may disqualify you entirely from getting a cash-out refinance if you don’t have enough equity built up.

Which home equity method is right for you?

Determining which method of accessing home equity is best for you can be complicated – and it’s a decision you shouldn’t make without careful consideration. When making a decision, keep in mind these costs and benefits:

• If you want to access your money a little at a time, choose a HELOC.
• If you want a lump-sum payout, a home equity loan will provide it. Be mindful, though, that this method likely means you’ll have two mortgage payments – a pretty daunting idea for some people.
• If you’re looking for a method that will provide security, a cash-out refinance is perhaps the way to go. It will allow you to maintain your current mortgage rate for the life of the loan, assuming your new loan comes with a fixed rate.

The bottom line: You have options for leveraging your equity

Life can be expensive, and surprise costs often come out of nowhere. Getting equity out of your home allows you to treat your home as an investment and address situations where you may need a significant amount of cash in fairly short order.

If you decide you want to take advantage of your home equity, you can tap into it by applying for a home equity loan with Rocket Mortgage.