5 Ways to Tap into Home Equity

Home is equal Levels have increased rapidly over the past few years, thanks to an accelerated Increasing home value, combined with low inventory levels and high buyer demand. According to ATTOM, as of the first quarter of this year, about 47% of mortgaged residential properties nationwide were considered equity-rich, meaning homeowners have at least 50% equity in their home. 2023 US Home Equity and Underwater Report.

Your home equity can be a useful financial tool. If you have equity in your home, you can tap into it when you need funds to cover home improvements, debt consolidation, education expenses, medical bills, or any other major expense. But what exactly are the options for tapping into your home equity? We’ll dive deep into home equity tapping methods below to help you get the most out of your home ownership.

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5 Ways to Tap into Home Equity

Here are five ways that homeowners can start using their home equity today.

Home equity loan

A Home equity loanAlso known as a Second mortgage, allows you to borrow against the equity you have built up in your home. With this equity-tapping option, you borrow against your equity and get a lump sum. Because this option offers access to an amount, it usually makes sense to consider it when you have a specific financial need that requires a large upfront payment, such as a home renovation project or debt consolidation.

With a home equity loan, the money you borrow is repaid in fixed monthly installments over a predetermined period – usually between five and 30 years. Interest rates for home equity loans Rates are generally fixed, and tend to be lower than rates offered on other types of loans, such as personal loans or credit cards. It is worth noting, though, that home equity loans also come Closing costsWhich can increase the total cost of borrowing.

Home Equity Line of Credit (HELOC)

A HELOC Another way to tap into your home equity. This option is a second mortgage, but it gives you a line of credit that you can borrow from as often as needed during the draw. HELOCs offer a unique type of flexibility because you can borrow and repay multiple times during this period Draw period. This makes them an ideal option for ongoing expenses or projects where costs may change over time, such as financing education or covering unexpected medical bills.

Just like with a credit card, you have a borrowing limit with a HELOC, which is a certain percentage of the equity you have in your home. This percentage limit varies among lenders, but is usually limited to 80% to 90% of your home equity. With a HELOC, you only pay interest on the amount you use at the time of your draw, but the interest rate is usually variable rather than fixed, so what you pay in interest can fluctuate depending on market changes.

Cash-out refinancing

Cash-out refinancing Another option you have is to tap into your equity, but it’s not a second mortgage like a HELOC or home equity loan. With a cash-out refinance, you’re replacing your existing mortgage with a new one that has a higher loan amount based on what you’re borrowing from your equity, allowing you to access the cash difference.

If you want to take advantage of lower mortgage rates, this option may be worth considering. You can use a cash-out refinance to access your equity while extending the term of your loan or convert an adjustable-rate mortgage to a fixed rate while accessing your home equity. It’s worth noting, though, that if your current rate is lower than the rate currently being offered, it may not make sense to take this route. It is also important to carefully consider the fees and closing costs associated with refinancing.

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reverse mortgage

reverse mortgage Especially for homeowners 62 and older, but if you’re able to meet the age requirement, a reverse mortgage will allow you to convert a portion of your home equity into loan money. But unlike other options, you don’t have to make monthly payments on the money you borrow. The loan is paid off when you sell the home, move or die.

A reverse mortgage may be an option worth considering for retirees who want to supplement their retirement income or cover unexpected expenses with the equity they have built up in their home. However, it is important for potential borrowers to fully understand the terms, potential risks and eligibility criteria before pursuing this option, as this equity product works completely differently from other home equity options.

Home equity sharing

A relatively new concept, home equity sharing allows homeowners to sell a portion of their home equity to investors or companies in exchange for a lump sum payment. In this arrangement, the investor shares the future perception of your home’s value. What can be attractive about home equity sharing is that it provides instant access to funds without taking additional loans or making monthly payments and without being burdened with interest.

These types of home equity products are generally easier to qualify for compared to HELOCs or home equity loans. Instead, it can be a solution for homeowners who can’t access their home equity through more traditional methods, or for those who need access to liquidity but don’t want to take on more debt. However, it is important to carefully evaluate the terms, conditions, and potential long-term implications before entering into an agreement to share home equity.

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Bottom line

Tapping into your home equity can be an effective strategy to meet your financial needs. There are plenty of options for doing this, including home equity loans, HELOCs, cash-out refinancing, reverse mortgages or home equity sharing. Before you decide to cash out the equity you’ve built up in your home, it’s important to consider your specific situation, goals, and financial plans. Owners should compare interest rates, fees and repayment terms to find the option that best aligns with your needs.