What is Home Equity and How to Tap into It
You’ve probably heard the term “home equity” before but do you know what it means, and more importantly, how to use it? We’re here to help.
Home equity is the portion of your home that you’ve paid off. It’s the difference between what the home is worth and how much is still owed on your mortgage. As your home’s value increases over the long term and you pay down your loan amount, your equity grows.
Tapping into your home’s equity can be a good way to access cash quickly to pay for renovations or pay off high-interest credit card debt, but it’s important to first determine how long you’ll live in your home before borrowing against it. You don’t want to borrow more than you need or put your house at risk of foreclosure for an irresponsible purchase.
Here are a few ways you can tap into your home equity:
✔️ Cash-out refinance
This type of refinancing replaces your existing mortgage with a new home loan for more than your current loan amount – with the difference being the extra cash. Lenders will generally let you borrow enough to pay off your current mortgage and take out more cash, usually up to 80% of your home’s value.
✔️ Home Equity Line of Credit
A HELOC is another way to borrow against the value of your home. With a HELOC, you receive a line of credit — usually up to 80% of your home’s value, minus the amount of your current loan amount.
✔️ Home Equity Loan
With a home equity loan, instead of getting a line of credit that you can tap into as needed, you would receive a lump sum of money. A home equity loan could make sense if you don’t want to do a cash-out refinance because you have a low-interest rate.
Before you run to the bank, it is important to understand and weigh the pros and cons of each option, as well as your personal financial goals. If you’re thinking about tapping into your equity, send us a message — we’d be happy to provide a free home equity assessment!