How to use home equity while prices are still high
Following years of upward momentum, home prices across the country are showing mixed signals.
According to March 2023 data from Redfin, home prices nationwide dropped an average of 3.3% compared to a year ago. Meanwhile, the most recent Black Knight Mortgage Monitor report reveals prices are rising in 92% of all markets from February to March, and in 40% of major markets they’ve even returned to peak value.
If you’re like most American homeowners, your home gained value during the pandemic — meaning you could now be sitting on a large amount of home equity. Real estate research firm CoreLogic data shows American homeowners had an average of $270,000 in home equity in late 2022, up $90,000 from pre-pandemic values.
With that type of significant equity in your home, you may be able to tap into it to help cover costly expenses, fund a home improvement project or consolidate debt. Options for borrowing from home equity, like home equity loans, HELOCs, and cash-out refinances, often have more favorable interest rates than credit cards and personal loans.
But before you start the borrowing process, it’s essential to find the best option for using your home equity based on your financial goals and other factors.
Start by exploring your home equity options here now to learn more.
How to use home equity while home prices are high
Here are four home equity options to strongly consider using now while prices are still high.
Home equity loan
A home equity loan is an installment loan that allows you to borrow a portion (usually 75% to 85%) of your home’s equity for virtually any purpose. Generally, these loans come with fixed interest rates and repayment terms ranging from five to 30 years.
You can calculate your home equity using the difference between the balance you owe on your mortgage loan and your home’s current market price. Let’s say you purchase your home for $300,000 and pay $100,000 down on your mortgage over time. That puts your mortgage balance at $200,000. At the same time, your home value increases by $100,000 to a $400,000 fair market value. In this case, your home equity would be $200,000 ($400,000-$200,000).
Now, to find your home equity loan potential, you can use that same number. If your lender allows homeowners to borrow up to 80% loan-to-value (LTV), you’ll know you may qualify for up to a $160,000 home equity loan (200,000 x 80%).
However, you should only borrow the amount you need since you’ll pay interest on your entire loan. With good credit, you may qualify for a home equity loan with rates as low as 6% – 8% today.
Like other home equity borrowing options, you must put up your home as security for the loan, meaning you could lose your home if you default.
Check out your home equity loan options here.
A home equity line of credit (HELOC) allows you to access your home equity as revolving credit, much like a credit card. One of the key benefits of HELOCs is that you don’t have to withdraw the entire amount you’re approved for. You can borrow only as much as you need, when you need it. That can help you keep your overall interest owed lower, since you’re only charged interest on the amount you withdraw from your HELOC.
But the interest you’ll pay shouldn’t be the only thing you consider. “Base your decision about your HELOC term and your HELOC amount based on cash flow, not based on interest rates,” says Ben Miller, branch manager at American Mortgage Network. “Where is your budget? Let’s talk about your comfort zone. Where do you need to be?”
As with home equity loans, you’ll also need to account for any closing costs you’ll pay for a HELOC. These can range from 2% to 5% of the amount you borrow, although some lenders do not impose closing fees. Of course, you’ll want to shop and compare interest rates among lenders to get the best rate.
Check your HELOC options here to learn more.
A cash-out refinance involves refinancing your existing mortgage into a larger loan, which also allows you to tap into a portion of your home’s equity. Ultimately, you’ll end up borrowing a larger loan amount but also have a lump sum of cash in hand. While a home equity loan may be called a second mortgage, an additional loan alongside your first mortgage, a cash-out refinance is a single loan.
Here’s how it works: Let’s say you own a home worth $800,000 on the market and have $400,000 remaining on your mortgage balance. Lenders typically allow you to borrow up to 80% loan-to-value, meaning you may qualify to borrow as much as $320,000 (80% of $400,000 home equity). With a cash-out refinance, you would take out a new loan, use it to pay off your current mortgage and keep the resulting cash to use at your disposal.
While the cash could come in handy, it also leaves you taking on more debt. And if you’re starting a new 30-year loan, you could pay more interest over the life of the loan.
Check your refinance options here to learn more.
Many retirees and older Americans might consider a reverse mortgage as a way to use their home’s equity to help meet living expenses or other purposes.
The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM) and is only available to homeowners who are 62 and older. You must continue to use the home as your principal residence, but you no longer have to make monthly mortgage payments. Instead, you or your heirs will repay the loan when you no longer live there.
Your balance will continue growing as interest and fees are tacked on to your loan balance each month. Plus, you’re still responsible for paying property tax and homeowners insurance. A reverse mortgage may benefit seniors who are “house rich,” with abundant home equity but short on cash flow for day-to-day expenses. Be aware, however, that your balance will rise, and your home equity will fall over time. Ultimately, you or your heirs must still repay the loan, which most people do by selling the home.
The bottom line
With home prices significantly higher in many parts of the country today than they were before the pandemic, you may have enough home equity to access the cash you need for an emergency expense, debt consolidation, or renovation project. With home equity loans and HELOCs, you may even qualify for a tax deduction if the funds were “used to buy, build, or substantially improve a qualified home,” according to the IRS.
Before you apply, look at your individual finances to determine how a new loan payment would fit within your budget. Additionally, shop and compare lenders to identify which one offers the lowest costs.