Home equity is the difference between what you owe on your house and its current market value. If you owe $200,000 on your house (mortgage and any other loans), and your home is worth $400,000, you have $200,000 in equity.
When you’ve established equity, it sits in your house. But it’s not inaccessible. Home equity loans, home equity lines of credit and home equity agreements allow you to access that equity and use the funds for your needs.
Taking advantage of home equity can also result in more favorable terms on your mortgage. By refinancing, you may be able to get a lower interest rate, eliminate private mortgage insurance or reduce the length of your mortgage.
Home prices continue to set records nationwide – but now the Fed has raised interest rates for the second time this year.
Before interest rates rise even further, you may want to consider taking advantage of your rising home value, without selling. You can do this by accessing home equity. As your home’s value rises, the value of your investment also rises.
Some ways to access your home equity without selling include a home equity loan, home equity line of credit, home equity agreement or some types of mortgage refinancing.
The housing market has favored sellers for some time. Just talk to anyone trying to purchase a home, and you’ll hear stories of homes receiving dozens of offers and selling for tens of thousands over the asking price.
WATCH: Rising Interest Rates: The Housing Market And How You'll Be Impacted
Those homeowners who sell over the asking price may then turn around and enter the whirlwind buyer’s market themselves. In many cases, they’ll lose the gains in equity they made on their sale because of the price they’ll have to pay on their next home.
Instead of subjecting yourself to the whims of the housing market, you may be able to take advantage of your rising home value without selling.
There are several ways to tap into your home equity after your home’s value rises. The most common types are the following:
Home equity loan: The home equity loan works like a second mortgage. You’ll have to apply to a lender for the loan, pay closing costs and use your home as collateral for the loan. As a loan, you’ll also be repaying interest.Most home equity loan lenders allow you to access up to 75% or 80% of your home’s equity.
Home equity line of credit (HELOC): The HELOC works like a credit card attached to your home’s value. You draw money from the line of credit for some time (the draw period) and then repay it once the draw period closes. As with a home equity loan, most lenders allow you to access up to 75% or 80% of your home’s equity. It also works as a loan, so you’ll also repay interest.
Home equity agreement (HEA): An HEA provides cash in exchange for a percentage of your home’s future value. Instead of making a monthly loan payment plus interest, you end the agreement by selling, refinancing or buying back your equity from the HEA provider.
When you use any of these methods, you receive money in hand. You can use these funds for your choice of purposes. Here are a few ideas.
One way to improve your home’s curb appeal or comfort is to renovate. Perhaps remote work has you wanting a defined home office, or maybe you’d like to do that landscaping project you’ve been putting off.
In addition to adding functionality and comfort for your life, you may want to consider the value your renovations might add. Hardwood floors, updated kitchens and window replacements often attract future buyers. Depending on your project, the interest on your loan may even be tax-deductible.
Buy an investment property
Depending on your situation, buying and then renting out an investment property could be a great way to earn income.
You might consider funds from using your primary residence’s home equity for a down payment. If you used a home equity loan, for instance, you could obtain up to 80% of your home’s equity, and then transform that into a payment toward your new investment.
Similarly, you could purchase land and build a new home. If you’ve got your eye on retirement, it could be worth your while to build a future retirement or vacation home.
Start a college fund
The cost of sending a child to college can be more than $200,000, depending on the school.
While some parents may downsize, sell their home, and use the gains to pay for college, that strategy risks losing those gains to capital gains taxes. Another plan may be to use a cash-out refinance (described below), home equity loan, HELOC or home equity agreement, and then transferring those funds into a tax-advantaged 529 college savings account.
Pay off debt
Besides a mortgage, many homeowners also owe credit card, personal loan, student loan and auto loan debt. Interest charges on credit cards can balloon. You could use your home equity funds to pay off high-interest debt.
Refinancing your mortgage
In addition to accessing home equity, you may also consider refinancing your mortgage to take advantage of your home’s risen, or rising, value. With the right terms, you could potentially eliminate private mortgage insurance, reduce your payback period or get a more favorable interest rate.
- Traditional refinance: You can refinance your home’s mortgage through the same process as you did when you applied for the first mortgage. To refinance, you’ll get a new loan that pays off the balance of the existing mortgage – preferably with a lower interest rate.
- Cash-out refinance: This works similarly to a traditional refinance. The difference is that you receive more money than needed to pay off your existing mortgage. You can then use the extra money for your purposes.
- Reverse mortgage: This option is only available to homeowners aged 62 or older. Through certain government-backed lenders, you can receive money in monthly installments that you pay back when you sell or leave your home.
A home equity loan or HELOC provides money, but an HEA is not a loan, so requires no monthly payments. You can often access up to about 80% of your home’s equity with an HEA from Unlock Technologies. That cash is available for anything you see fit.
Contact us today to get started.