Home equity values have soared in recent years, offering homeowners the opportunity to access cash from their homes. According to a May 2024 report from real estate data company ICE Mortgage Technology, 48 million U.S. homeowners with mortgages have tappable equity of $206,000 per borrower, up from $185,000 at the same time last year. Two-thirds of homeowners with tappable equity have excellent credit, smoothing the way to access products such as home equity loans and lines of credit, cash-out refinancing and reverse mortgages.
If you’ve seen your home’s value rise and want to access your home equity, read further to learn about your options.
[Read: Best Home Equity Loans.]
How to Calculate Your Home’s Equity
Home equity is the portion of your home you own, calculated by subtracting your mortgage balance from your home’s current market value. For example, if you have a $300,000 home and owe $200,000 on your mortgage, you have $100,000 in home equity. As you pay down your mortgage or your home’s value increases, your home equity grows.
If you’re curious about how much home equity you have, Dave Krichmar, a mortgage banker in Houston, recommends contacting the real estate agent who helped you buy your home. “Ask about comparable sales to get an idea of what homes go for in your area,” Krichmar says. “You can also look at real estate websites such as Zillow or your county’s appraisal district, though these offer less accurate valuations.”
Before you get a home equity loan, equity lenders typically order an appraisal to determine your home’s value. For a home equity line of credit, or HELOC, many will do an automated appraisal without going to your home, says Krichmar.
Usually, lenders will only allow you to borrow up to 80% to 85% of your home’s appraised value. The total debt secured by your home — which includes your current mortgage and new home equity loan — can’t be more than 80% to 85% of your home’s appraised value.
[READ Best HELOC Lenders]
Ways to Tap Your Home’s Equity
Once you know how much equity you’re working with, consider your options for tapping the value of your home. Your options include refinancing, home equity loans or lines of credit, or a reverse mortgage.
Cash-Out Refinance
With a cash-out refinance, you borrow more than you owe on your mortgage and get cash at closing for the difference. Your new, larger mortgage replaces your old one, and you can use the money you took out of your equity for anything you’d like.
Cash-out refinances may not be worth it with today’s interest rates, as refinances should provide you with more favorable lending terms — which might not be achievable right now.
“A few years ago, when interest rates were at record lows, cash-out refinances were very popular,” says Michael Micheletti, chief communications officer with Unlock Technologies, a home equity agreement broker. “At today’s higher rates, though, they’re usually not the best option unless, for some reason, a homeowner has an exceptionally high mortgage rate.”
You might choose a cash-out refinance if the interest rate is lower than your current mortgage rate and you want a lump-sum payment.
Home Equity Line of Credit
A HELOC is a line of credit secured by your home’s value. With a HELOC, you have a revolving line of credit similar to a credit card with a variable interest rate. You can use your credit line as needed and repay it, which means you can borrow against your credit line multiple times as long as you pay it back before you borrow again.
“When comparing a first mortgage and a HELOC, many times a HELOC will have fewer fees than a complete refinance on your first mortgage,” says Krichmar. For example, you may not need to pay title company fees or pay for an appraisal when you’re doing a HELOC, but you should expect those fees with a cash-out refinance.
A home equity line of credit is a good choice if you’re not sure how much you need to borrow or you may need to borrow more than once.
Home Equity Loan
A home equity loan is a second mortgage that borrows against your home’s equity. Not to be confused with a HELOC, a home equity loan offers borrowers a lump-sum payment paid back in fixed installments, and the interest rate stays the same for the life of the loan.
While a home equity loan can leave your first mortgage intact, Krichmar cautions that home equity loan qualifications tend to be stricter than those of a first mortgage because it’s a second lien position, and the interest rate tends to be higher for the same reason. For example, if your home were to be foreclosed on, the first mortgage would be paid first, and then your second mortgage — your home equity loan — would be paid after that.
Home equity loans can be helpful if you want a lump-sum payment but don’t want to make any changes to your mortgage.
Reverse Mortgage
Reverse mortgages are home equity loans for homeowners 62 and older. With a reverse mortgage, the lender makes payments to you, adding interest to your loan balance each month. Unlike other home equity loans, you don’t make monthly payments on a reverse mortgage until you sell your home, move out or pass away.
If you sell your home, you’ll have to pay back the loan in full but can keep any remaining proceeds. If you die, your heirs may buy the home from the bank, sell it to pay the loan balance and keep any remaining proceeds or turn the home over to the lender to satisfy the debt.
“A reverse mortgage is still a mortgage, and there is an interest rate,” says Micheletti. “As with traditional mortgage loans, interest rates are much higher now than a few years ago. Variable rates are a bit lower than fixed rates, but they are indeed variable and can change at any time. This in itself keeps many seniors right now from further considering a reverse mortgage.”
Consider a reverse mortgage if you’re 62 and older and plan to stay in your home. However, think about whether you want to leave your home’s equity value for your heirs.
[Read: Best Home Improvement Loans. ]
Tips for Tapping Home Equity
As you shop home equity products, consider whether tapping your home equity is a good idea and which options work best for you.
— Compare home equity loans to other financing. Home equity loans typically offer lower interest rates than unsecured loans or credit cards, and your interest may be tax-deductible. However, other financing options, such as personal loans and credit cards, don’t put you at risk of foreclosure.
— Understand closing costs. Borrowing money costs money, and loan products generally differ in how much you’ll pay in closing costs and other fees. For example, a cash-out refinance may require an appraisal inspection, title insurance and other fees that can add to the cost of borrowing.
— Know your home’s worth. Getting a home equity loan might not be worth it if you don’t have significant equity value — for example, if you just bought your home a few years ago and wouldn’t be able to take out much value at this point.
— Calculate how much you need to borrow. If you have immediate plans for your home equity, such as home improvements or education, you might prefer a lump-sum home equity option such as a home equity loan or cash-out refinance. If you’re less sure, the flexibility of a HELOC may be better for you.
— Consider your current mortgage. If you’re happy with your mortgage rate or other features and don’t want to make a change, a cash-out refinance isn’t a good option. Instead, consider a HELOC or home equity loan that will leave your first mortgage intact.
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How to Access Your Home’s Equity originally appeared on usnews.com
