Whether it’s a kitchen remodel or dedicated workspace at home, after a year of staying in, most homeowners have at least entertained the idea of a home renovation project.
Skyrocketing home prices have resulted in a record amount of home equity on hand. By the end of last year, roughly 46 million homeowners held a total of $7.3 trillion in equity to tap, the largest amount ever recorded, according to Black Knight, a mortgage technology and research firm.
Still, it’s not always easy to access that money. Since the start of the coronavirus pandemic, several large banks stopped offering home equity lines of credit altogether to lower their exposure — or risk — during uncertain economic times.
Home values have soared, and that buys owners more options.
Ask the typical buyer in today’s housing market about his or her experience, and you’ll probably get a similar answer — there aren’t enough homes to buy, and the ones that are on the market are way too expensive.
What is home equity?
Home equity is the portion of your home that you own outright, and you calculate it by taking the market value of your home and subtracting the amount of money you owe on your mortgage.
Say that, based on today’s market, your home could sell for $450,000. If you owe $150,000 on your mortgage, that leaves you with $300,000 in equity.
How to use home equity to your advantage
If you’re selling a home, the more equity you have in it, the larger the payday you could walk away with. Let’s go back to our example of $300,000 of equity in a $450,000 home. If you sell at that price, you have a $300,000 profit to enjoy once you pay off your mortgage. In reality, you probably won’t keep the entire $300,000 because of real estate agent commissions and real estate transfer taxes (fees some states charge for selling a home).
But you can also take advantage of your home equity even if you aren’t planning to sell — by borrowing against it. You have several options.
Home equity loans
With a home equity loan, you borrow a lump sum of money and pay it back in equal installments. Taking out a home equity loan can be an affordable way to borrow, and you can use the money for any purpose, whether it’s renovations, paying off other debt, or even for college tuition.
Home equity lines of credit (HELOCs)
With a HELOC, you get access to a line of credit you can draw from as needed. You generally get five to 10 years to take withdrawals, and you pay back the amount you borrow. HELOC payments can be less predictable than home equity loan payments, because HELOC interest rates are usually variable, not fixed. However, a HELOC also gives you a lot of flexibility. If you’re renovating, for example, and you’re not sure whether it will cost $20,000 or $30,000, you can get a $30,000 HELOC, borrow the exact amount you need, and avoid paying interest on a higher loan amount.
Cash-out refinancing
With a cash-out refinance, you borrow more than your current mortgage balance, and you can use the rest of the money you get for any purpose. Going back to our example in which you owe $150,000 on your mortgage but have $300,000 in home equity, you could easily qualify for a $300,000 cash-out refinance. The first $150,000 would pay off your existing mortgage, leaving you with $150,000 to spend as you please. Like home equity loans, cash-out refinancing can be an affordable way to borrow, especially given today’s refinance rates, and your payments are fixed because they’re rolled into your regular monthly mortgage payments.
The fact that home equity has risen gives today’s property owners more financial flexibility. If you need money, consider the different ways you can tap your home equity to get it. Just be careful: Any loan you take out against your home is still a debt that needs to be repaid, and you don’t want to go overboard.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.
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