How can I use my home’s equity?
Home equity is the actual financial amount of the home you own, so it can be used like the returns on any other investment. Because it’s not as accessible as your checking account and you worked hard accruing it, it’s best to limit its use to home improvements, removing private mortgage insurance, a down payment on a second home, college tuition or emergencies.
Below, we’ll explore how to build home equity, how you can access it—whether that’s a line of credit, loan or refinance—and how you can use it.
What exactly is home equity?
Home equity is the assessed market value of your home minus how much you owe on your mortgage. In other words, it’s the portion of your home that you’ve actually paid for and own. Purchasing a home with a down payment? That’s likely the only equity you have in your home so far.
How can I increase my home equity?
Each time you pay your mortgage, your balance is reduced, and your equity grows.
If your property value goes up, so does your home equity. There are a couple of ways this happens:
- You renovate your home, contributing to how much your home is worth.
- There’s more demand than supply in the housing market. This has less to do with your efforts and more about the economy. If there’s an inventory shortage and a demand for housing, or if your neighborhood is developing, home values will generally go up.
What can I do with home equity?
There are a variety of reasons you may want to take advantage of your home equity. Here’s just a few.
- Home improvements: Updates can be financed with your home’s equity. In fact, if they increase your home’s value, they practically pay the home equity you borrowed back. You could also itemize your tax deductions to deduct the interest.
- Remove mortgage insurance: While only eligible for mortgages with Conventional loans which require mortgage insurance if you put less than 20% down, you can remove your mortgage insurance if you increase your home equity by at least 20%.
- Down payment: If you’re planning to buy a new or second home, you may use the equity you earned in your first home towards a down payment on another.
- Tuition and education costs: Using home equity may be a good avenue if home equity rates are lower than private student loan rates.
- Debt consolidation: High-interest credit card debt could be consolidated into your mortgage at a much lower rate over a longer term, reducing your monthly expenses.
- Accidents, emergencies or medical expenses: As long as you have a plan to pay it off, rest assured you can utilize your home equity to stay afloat.
How can I access the equity?
HELOCs, HELOANs, cash-out refinancing and Flex Payment Mortgages are a few avenues to accessing your home’s equity. The best one for you depends on your financial situation, how much money you need and what you’re using it for.
| HELOCs | HELOANs | Cash-out refinancing | Flex Payment Mortgage | |
|---|---|---|---|---|
| Kind of financing | Line of credit for primary, secondary or investment homes | Lump-sum loan for primary, secondary or investment homes | A refinance and loan (need at least 20% home equity) | Refinance or loan that doesn't require monthly payments (for ages 62+) |
| Major benefit | Borrow funds as needed; only charged interest for the amount you’re using; tax deductions for home improvements | Predictable monthly payments, usually at a fixed interest rate; a single lump-sum upfront; tax deductions for home improvements | A new loan term while getting cash at the same time; tax deductions for home improvements | Supplements retirement income; no payments unless you move, sell or pass away (taxes, HOA and insurance still required); tax deductions for home improvements; never owing more than the home’s value |
| Best uses | Home improvements that involve stages and indefinite costs; tuition; emergencies; down payment | Home improvements with definite costs; tuition; emergencies; down payment | Home improvements; consolidating or paying off debt; tuition; emergencies; down payment | Home improvements; refinancing or purchasing a new home; additional income; eliminating mortgage payments; down payment |
What should I not use my home equity for?
It’s best to avoid using your home equity for discretionary purposes.
- Expensive vacations
- Wedding planning
- Non-emergency vehicle purchases
You may end up paying more than the trip was worth over time with interest. If you’re unable to pay it off, you could lose your home to foreclosure. Plus, vehicles depreciate over time—without a significant return, it’s hard to justify using your home equity. Unless it’s an emergency, stay on the safer side.
Home equity is an incredibly valuable resource for homeowners, one that increases with each mortgage payment. If you’re ready to take advantage, reach out to one of our experts in your community to help weigh your options.
The above information is for educational purposes only. All information, loan programs & interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.