What Is Home Equity and How Can You Get Access to It?

✏️ Editor’s Note: Realtor Associations, agents, and MLS’ have started implementing changes related to the NAR’s $418 million settlement. While home-sellers will likely save thousands in commission, compliance and litigation risks have significantly increased for sellers throughout the nation. Learn how NAR’s settlement affects home buyers.

$27,956! That’s how much an average mortgaged homeowner added in equity in Q1 2024, an increase of 9.6% Y-O-Y. Moreover, the combined home equity has reached a whopping $1.5 trillion for all the borrowers in the US.

Besides this, in a survey of 1,810 homeowners, more than 38% are likely to use their property equity to renovate their properties. Whereas, 57% of homeowners are also expected to apply for a home equity loan or a HELOC in the future.

This shows that more Americans use their home equity as a financial tool. You can access it with a home equity loan, HELOC or a cash-out refinance. You can search for lenders with Houzeo and choose the option that fits your needs.

What Is Home Equity and How Does It Work? 

Home equity is the percentage of ownership in your home. We define home equity as the difference between your mortgage balance and how much your home is worth. 

As you make the payments for your mortgage, the loan amount decreases, and the equity in your home increases. Your house equity is a powerful financial asset that you can use for home renovations. This is also one of the ways to increase your property’s value.

However, if your home value declines, you can lose equity. This can also happen if you take a second mortgage and use your equity as collateral. The market conditions also affect your equity and can fluctuate with time. 

How Can You Calculate It?

To determine the equity built up in your house, you must follow these steps:

Find an Estimate of Your Home’s Value

You can use an online free home price estimator to know your home’s worth. Alongside this, you can research the value of sold homes in your neighborhood. 

Subtract Your Remaining Loan Amount

After you get the current property value, you need to subtract it from your loan balance and other debts on your property. 

For example, if you buy a home worth $400,000 with a 20% down payment, your equity will be $80,000. When you make consistent mortgage payments, your loan balance gets reduced. 

When you pay off the complete mortgage, your equity reaches 100%. You can also calculate your home’s worth with Houzeo.

How Can You Use Home Equity? 

Here are the 4 ways you can utilize your property equity:

• Fund Your Home Improvements: You can use the cash to finance renovations and boost your home’s value. You can apply for a home equity loan to access funds for home improvements. 
• Eliminate Private Mortgage Insurance: You can get rid of private mortgage insurance when your property equity reaches 20%. Also, when you cancel PMI, you eliminate your mortgage balance added to your monthly payments. 
• Cover Other Outstanding Balances: You can opt for a HELOC or HEL to settle debts with high interest rates. This can help you save thousands of dollars in interest over time.
• Finance Your Education: With college expenses on the steady rise, a home equity loan can help you bridge the funding gap for education. This is also a better option than the other student loans that offer high interest rates. 

How Can You Get Access to Your Home Equity?

You can tap your property equity with a cash-out refinance, home equity loan, or HELOC and reverse mortgage.

Cash-Out Refinance

A cash-out refinance replaces your existing loan with another, bigger mortgage and you get the difference in cash. It takes around 30-45 days to refinance. 

However, you need to leave some equity in your home when you opt for a cash-out refinance. 

Home Equity Loan

A home equity loan is a second mortgage and doesn’t replace your current loan. These loans have fixed interest rates and the interest is usually tax-deductible if you use them for home improvements. 

Nevertheless, the minimum amount you borrow varies by mortgage lenders but it’s typically between 80% and 90% value of your home. 

Home Equity Line of Credit (HELOC)

A HELOC works like a credit card with changing monthly payments or interest at a variable rate. You can withdraw money as needed during the draw period up to a predetermined limit your lender decides. 

Moreover, you can make repayments in the draw period too and the credit line goes up. This way you can withdraw money again. 

Reverse Mortgage

Homeowners who are 62 or older can opt for a reverse mortgage and gain access to their house equity. Here, the money you withdraw need not be repaid in monthly payments. 

Rather, the lender pays each month till the time you stay in your home. The principal loan amount and the interest must be repaid when the borrower dies or sells the property.

Pros and Cons of Using Your Home Equity

The equity you build up in your house can help you cover large expenses and consolidate higher-interest debts. However, it’s important to weigh the pros and cons to make an informed decision.

Pros

• Lower Interest Rates: HELs and HELOCs have lower interest rates as compared to credit cards, unsecured loans, and other home improvement loans. As your home serves as collateral, the lenders have less risk. 
• Less Strict Criteria: You have less stringent requirements to get approved as the lenders can relay the equity to lower their risk. 
• Flexible Use: You can use the money for any financial purpose when tapping into your property equity. 

Cons

• Risk of Foreclosure: Your house may face foreclosure if you fail to make monthly mortgage payments on time or default. That’s how lenders try to recoup their funds.
• Increased Mortgage Debt: When you take out any loan, your debt increases. This affects your cash flow and you’re left with less money for other expenses.
• Other Added Costs: You may have to pay closing costs, origination fees, appraisal fees, and title insurance while taking these loans.

Bottom Line

Home equity represents the portion of your home you own outright. It is a powerful tool to access funds for various financial needs like home remodeling, education, or buying a new house.

You can access it with a home equity loan, HELOC, cash-out refinance, and reverse mortgage. If you are looking for low-interest options to borrow against your home, then you can opt for a cash-out refinance. You can tap into your house equity and search for lenders online with Houzeo. 

Frequently Asked Questions

• Home Equity