What is home equity?

If you're looking to make smart financial decisions or simply curious about your options, read on to discover how to use home equity as a powerful resource.

In this comprehensive guide, we'll break down what equity in a home is, explain how it works, and explore the different ways you can use it to your advantage.

If you know you’re ready to use your home equity for a specific project, you can also apply for a home equity line of credit today to tap into the money you have in your home.

What is Home Equity?

Home equity is the difference between the current value of your home and the outstanding balance of your mortgage — essentially, it's the portion of your home’s value that you own outright.

If you still owe money on your mortgage, you only own the percentage of your home that you’ve paid off, while your mortgage lender owns the rest until you pay off your loan.

How Does Home Equity Work?

As you make payments on your mortgage, you reduce the principal — the balance of your loan — and build equity. Your equity can increase in these ways:

Through Mortgage Payments

Every mortgage payment you make reduces your loan balance and increases your equity. Initially, a larger portion of your payments goes toward interest rather than the principal.

Over time, as you pay down your mortgage, more of your payment goes toward reducing the principal balance. This process, known as amortization, helps you build equity faster in the later years of your loan.

Paying more than the minimum required monthly payment can also accelerate the growth of your equity by reducing your loan balance more quickly.

Home Value Appreciation

Your home equity can increase if the market value of your home rises. Market values can fluctuate due to various factors such as:

Location
Economic conditions
Housing market trends.

For instance, if you bought a home for $250,000 with a $200,000 mortgage and a few years later, the home appraises for $300,000, your equity increases. If you had paid down your loan to $150,000, your equity would be $150,000.

However, this process can also work in reverse. If property values in your area decline, your home equity can decrease, even if your mortgage balance remains the same.

Strategic Down Payments and Mortgage Choices

Making a larger down payment when purchasing your home gives you immediate equity. For example, a 20% down payment on a $300,000 home provides you with $60,000 in initial equity.

Choosing the right mortgage type can also affect how you build equity. Avoiding interest-only loans, where principal payments are delayed, can help you build equity more consistently over time.

Understanding these dynamics allows homeowners to make informed decisions to maximize their home equity, turning it into a valuable financial resource.

How Can I Estimate How Much Home Equity I Have?

Here’s a step-by-step guide to help you calculate equity:

Step 1. Determine Your Home’s Current Market Value

You can get an approximate value using our home valuation estimator. When you search for a specific address, we will search millions of home records in our database to provide a real world estimate, scope out the competition, and explore options that help you get the best return on your investment.

We do not guarantee accuracy, so for a more precise valuation, consider hiring a licensed appraiser or checking the sale prices of similar homes in your neighborhood.

Step 2. Find Your Mortgage Balance

Check your latest mortgage statement to see the remaining principal on your loan. You can also contact your lender for this information. Ensure you include any other debts secured by your home, such as home equity loans or lines of credit.

Step 3. Calculate Your Home Equity

Subtract your mortgage balance from your home’s current market value. The resulting figure is your home equity. For example, if you owe $150,000 on your mortgage and your home is valued at $350,000, your home equity is $200,000 ($350,000 - $150,000).

Here’s a simple formula for clarity:

Home Equity = Current Market Value - Mortgage Balance

Can I Borrow Against My Home Equity?

Yes, you can borrow against your home equity through various financial products, each offering unique features and benefits. Here are the main options available:

Home Equity Loan

A home equity loan, often referred to as a second mortgage, allows you to borrow a lump sum of money against your home’s equity at a fixed interest rate. The loan is repaid over a set term with regular monthly payments.

This option is ideal for large expenses such as home renovations and debt consolidation. The stability of fixed monthly payments can help with budgeting, and if the funds are used to improve your home, the interest may be tax-deductible.

Home Equity Line of Credit (HELOC) *

A HELOC is a revolving line of credit that you can draw from as needed, similar to a credit card. The credit limit is based on your home equity, and you can withdraw funds during the initial draw period, typically up to 10 years.

HELOCs offer flexibility, as you can borrow and repay multiple times during the draw period, with interest usually charged at a variable rate. After the draw period, you enter the repayment phase, where you must repay the principal along with interest.

Cash-Out Refinance **

A cash-out refinance replaces your existing mortgage with a new, larger one. The difference between the new loan and your current mortgage balance is paid to you in cash, which you can use for any purpose.

This option can be beneficial if you can secure a lower interest rate on the new mortgage, potentially reducing your overall borrowing costs. However, you must maintain a minimum of 20% equity in your home after the refinance .

Reverse Mortgage ***

Available to homeowners aged 62 and older, a reverse mortgage allows you to convert part of your home’s equity into cash without selling your home.

The lender makes payments to you, and the loan, along with interest, is repaid when you sell the home, move out permanently, or pass away. This option can be a good choice for retirees looking to supplement their income without monthly repayment obligations.

Shared Equity Agreement

In a shared equity agreement, you receive a lump sum of cash in exchange for a percentage of your home’s future appreciation. This option can be appealing for those who are credit-challenged or facing financial obstacles that prevent them from securing traditional loans.

No monthly payments are required, and the investor is compensated when the agreement ends or when you sell the home .

How Do You Use Equity in Your Home?

Here is how to use home equity:

Home Improvements
Using your home’s value to reinvest in it can increase its market worth and enhance your living experience.

Common projects you can work on include:

Kitchen remodels
Adding a new room
Updating bathrooms
Improving landscaping.

Debt Consolidation

Home equity loans can be used to consolidate high-interest debts such as credit cards, personal loans, or medical bills.

These loans have typically lower interest rates compared to unsecured debt, simplifying your payments. This can be a huge financial relief if you have multiple high-interest debts.

Educational Costs

Using home equity loans for school helps prevent burdening graduates with excessive debt since they frequently have lower interest rates than private student loans.

Starting a Company

Using the equity of your house can help you to get money for start-up expenses, equipment purchases, or operational expansion without navigating the difficulties of traditional business loans.

Emergency Funds

Any moment can bring unexpected costs; therefore, having access to money via a home equity loan or HELOC offers a financial safety net.

Using your home equity can provide a quick and affordable answer for medical bills, emergency house repairs, or other unanticipated expenses when compared to high-interest credit cards or personal loans.

Eliminating PMI (Private Mortgage Insurance)

You’ll probably pay PMI if your down payment was less than 20% of your home’s purchase price. Once your equity gets to 20%, you can ask your lender to stop PMI, potentially saving a lot of monthly mortgage payments. Oftentimes, this process calls for an assessment to verify the present worth of your house.

Significant Purchases and Life Events

Major purchases or important life events can also be covered by home equity. You might pay for a dream trip, fund a major purchase like a car, or even help with a wedding. For these uses, a home equity loan can be more reasonably priced than high-interest credit cards.

How Do I Apply Right Now for a HELOC?

Your home equity and the lender's policies will determine how much you may borrow with a HELOC. Depending on your qualifications, at Rate you can open a line of credit for up to $400,000. The loan-to-value (CLTV) ratio taken as a whole can reach 85%.

Traditional HELOCs usually feature variable interest rates that change depending on the state of the market. Rate, on the other hand, provides a fixed-rate HELOC, so your interest rate during the loan term will not vary. When it comes to your monthly payments, this fixed-rate choice gives you consistency and stability.

Usually, lenders evaluate these elements to be eligible for a HELOC:

A minimum credit score of 640 (which is subject to change based on each lender).
Your debt-to-income ratio. To improve your chances at getting a HELOC, it’s advisable that your debt-to-income ratio not be more than fifty percent.
The combined loan-to-value (CTLV) ratio should be no more than 85%.
Eligible properties include single-family homes, townhouses, and condos.

Applying for a HELOC with Rate is a quick online procedure requiring only a few minutes. Here’s how you can apply:

Starting Your Application: Visit Rate's digital application to start your application. The process is hassle-free and 100% digital, which can provide you with a faster turnaround time.
Combine Your Accounts: Link your financial accounts to speed the evaluation process. Rate takes care of the specifics so that application is flawless.
Get Funds and Approval: If approved, you can get your HELOC money in as little as five days without paying any upfront fees. The rapid turnaround time allows you to access your line of credit far faster than with conventional HELOCs.

Apply for a HELOC with Rate now to get your financial future under control. If you have any questions, check out our current HELOC rates or get in touch with us by completing the digital HELOC application and you can get a response in as little as 24 hours.

Home Equity FAQs

1. Can house upgrades have a negative impact on home equity?

Yes, improperly done or too customized home modifications can lower the market worth of your house, therefore lowering your home equity. It’s important to choose enhancements that improve general quality and appeal.

2. Should one borrow against home equity, there are tax ramifications?

If the money is spent for significant house upgrades, yes the interest on home equity loans or lines of credit may be tax-deductible. See a tax adviser always to find out how these deductions apply to your circumstances.

3. Are investing uses possible from house equity?

Homeowners can invest in stocks, other real estate, or other businesses using their home equity. While this approach helps diversify financial portfolios, it runs the danger of using your house for maybe unstable investments.

4. What happens to home equity in the case of foreclosure?

The lender auctions the house in foreclosure to pay back the mortgage sum. After the sale and legal fee payment, any leftover equity could be given back to the homeowner; but, generally the equity is much reduced or lost.

* Guaranteed Rate home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently not offered in the states of New York, Kentucky, West Virginia, Delaware and Maryland. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Guaranteed Rate for more information and to discuss your individual circumstances. Restrictions Apply.

** Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Guaranteed Rate for more information

*** This is not a commitment to lend. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the borrower does not meet these loan obligations, then the loan will need to be repaid. Otherwise, the loan must be repaid when the last borrower passes away or sells the home. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states. Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision. This material has not been reviewed, approved or issued by HUD, FHA or any government agency. Guaranteed Rate is not affiliated with or acting on behalf of or at the direction of HUD, FHA or any other government agency. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call (800) 569-4287.

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