Want to Use Your Home Equity? You’ve Got Options.

Your equity is the portion of your home that you own (as opposed to your mortgage lender). If you’ve been making mortgage payments for some time, you’ve probably built significant equity. And thanks to home equity financing options, you can take advantage of your investment without selling your place.

Over the past couple years, high demand in the housing market has driven up home prices. Earlier this year, home prices soared more than 13% over the year before. Even though the market is finally cooling, prices remain elevated. That’s great news for homeowners. The more your home is worth, the more equity you can borrow against.

Why Use Your Home Equity?

Home equity financing uses your home as collateral, so it carries less risk for your lender. You, in turn, benefit from a lower interest rate and higher loan amount than you’d typically get from an unsecured loan.

Sure, you may have other ways to get the funds you need. You could use a personal loan or credit cards, but these usually have higher borrowing costs. You could spend cash, but you don’t want to wipe out your savings. You could also pull money out of investments or your retirement account, but this move will set you back in your retirement savings and may have costly tax consequences.

Considering the potential downsides of other funding options, it’s easy to see why so many homeowners use home equity for big-ticket expenses.

How Much Equity Do You Have?

Your home equity is the difference between the market value of your home and the amount you owe on your mortgage. Let’s say your home is worth $300,000, and you owe $150,000 on your mortgage. This means you have $150,000 in equity.

You can borrow against much of this equity with home equity financing. When you apply, your lender may order an appraisal to determine your home’s value. But, if you want to get an estimate of your equity now, try looking up your home’s value online and comparing this amount to your current mortgage balance. Use our mortgage calculator to get an idea of your loan-to-value (LTV) ratio.

Ways to Use Home Equity

Home equity financing is best used for things that will boost your financial security and quality of life. People often use it to consolidate high-interest debt (like credit cards), fund home improvements, help cover college tuition, or pay for surprise expenses.

What to Consider First

Just like when you originally financed your house, your lender will look at your financials to make sure you can afford your loan amount and monthly payment. They will consider how much equity you have, your credit score, and your current income and debt.

Your qualifications as a borrower and current interest rates will determine your cost of borrowing. Because home equity financing is secured by your home, you want to use your money responsibly and stay on top of payments.

What’s the best way to borrow against your home? It all depends on your needs.

Option #1: Home Equity Line of Credit (HELOC)

Like a credit card, this revolving line of credit lets you borrow as needed. If you’re planning for multiple expenses, a HELOC is probably the way to go.

• How it works: A HELOC is divided into two phases. First comes your draw period, when you can borrow from your credit line whenever you need to. Paying down your balance makes more credit available. Your draw period is followed by a repayment period when you can no longer access your HELOC and will repay the final balance on your credit line.
• Best for: Borrowers who want to stay ready for future expenses.
• Keep in mind: HELOCs usually have few or no closing costs, which saves you money upfront. But be aware that these credit lines usually have variable interest rates. Your borrowing costs could rise if rates go up.

Option #2: Home Equity Loan

Need your funds in one lump sum? This could be your solution.

• How it works: A home equity loan works just like your first mortgage. You get the funds upfront and repay your loan’s principal and interest in monthly payments.
• Best for: Paying for a single big expense, such as a kitchen renovation or debt consolidation. As an installment loan that usually has a fixed interest rate, a home equity loan has predictable payments that make budgeting easier.
• Keep in mind: If you take out a home equity loan in addition to your primary mortgage, this second loan may have a higher interest rate than your first mortgage.

Option #3: Cash-Out Refinance

When you refinance, you pay off your current mortgage with a new one. Homeowners often do this to get a better rate or different repayment term. With a cash-out refinance, you have the added benefit of taking out extra funds.   

• How it works: You refinance your home for an amount greater than your outstanding mortgage balance and get the difference in cash. You’ll repay these funds as part of your new mortgage payment.
• Best for: Homeowners who want to borrow more funds while getting the benefits of refinancing. For example, if your income and credit have improved since you bought your house, you may be able to qualify for a more affordable interest rate.
• Keep in mind: Because of the higher loan-to-value ratio that results from taking cash out, your refinancing costs may be higher than with a standard refinance. But when used wisely – such as to finance home improvements that add value to your home – a cash-out refi can be a good option.