How to get equity out of your house — without harming your finances
Due to rising home values, the average homeowner gained an additional $20,000 in home equity between the third quarters of 2022 and 2023, according to data analytics firm CoreLogic. Borrowing against your home equity can be more cost-effective than other forms of borrowing, like credit cards or personal loans. The most common ways to tap your home equity include home equity loans, home equity lines of credit (HELOCs), cash-out refinance mortgages and reverse mortgages. The best choice for you will depend on factors like how you plan to use the funds, market conditions and your long-term goals. To understand how to get equity out of your house, we’ll explore your options and walk you through how to apply. 4 ways to tap your home equity. To convert your home’s equity into cash, consider one of the four following options: Home equity loan Best for: Borrowing a lump sum without changing your current mortgage. A home equity loan, also known as a second mortgage, is an installment loan secured by your property. Your first mortgage is unaffected, and the home equity loan takes a secondary lien position. This means that if you default on your loans and your home is sold to repay your debt, your primary mortgage will be repaid first, and the secondary lien will be repaid next. Home equity loans have fixed interest rates — which means predictable monthly payments — and funds are provided in a lump sum. Lenders commonly offer repayment terms between five and 30 years. How much you can borrow will depend on the amount of equity you have. Most lenders allow you to borrow up to 80% of your home’s equity, though some may allow up to 90%. To understand how to calculate your equity, continue reading below. You’ll usually have to pay for an appraisal to qualify, and you’ll incur high upfront closing costs — often between 2% and 6% of your home’s value. As with any form of borrowing secured by your home, you run the risk of foreclosure if you can’t repay the debt. Pros Cons Fixed interest rates mean payments won’t change Rates are typically lower than other forms of borrowing, like credit cards or personal loans Your first mortgage won’t be affected Total borrowing costs are known upfront. Closing costs are high You must know how much money you’ll need upfront An appraisal is likely needed You’ll have a second monthly mortgage payment Risk of foreclosure Home equity line of credit (HELOC) Best for: Borrowing a variable amount. A home equity line of credit, or HELOC, is a form of revolving debt that works like a credit card. During the draw period, which typically lasts 10 or 15 years, you spend funds as needed, up to your preset limit. Your monthly dues are typically interest-only payments, and you only repay what you’ve borrowed. When the draw period ends, you’ll repay your principal balance plus interest over a set term, usually spanning 15 to 20 years. As with a home equity loan, your primary mortgage is unchanged when you borrow a HELOC. You can typically borrow up to 80% of the equity in your home (when combined with any other mortgages), though you may find lenders willing to let you borrow up to 90%. HELOCs come with variable interest rates and often don’t have as many large upfront costs as home equity loans — for instance, you’re unlikely to need title insurance. A home appraisal will be necessary, and the lender will often charge administrative fees. Depending on the details of your line of credit, closing costs may be as much as those on a home equity loan: 2% to 6% of your loan amount. “HELOCs generally have low to no closing costs and — given their variable nature — you’re able to benefit when rates start to come down without the need to refinance,” said Matthew Sanford, mortgage lending executive at Skyla Federal Credit Union. Pros Cons Borrow funds as needed Repay only what you borrow, rather than the full amount Interest-only payments during the draw period Variable rate could decline with the market. Variable rate means your borrowing costs could go up over time, making monthly dues unpredictable An appraisal is likely needed You won’t know the overall cost upfront You’ll have a second monthly mortgage payment Risk of foreclosure. Cash-out refinance Best for: Tapping equity and refinancing your current mortgage. A cash-out refinance replaces your existing mortgage with a new loan for a larger amount. You’ll then repay your current loan with the proceeds from the cash-out refinance loan and keep the extra money for other uses. You can generally borrow up to 80% of what your home is worth and pay back your debt over 15 to 30 years. Since you’re modifying your original loan, a cash-out refinance could be more expensive if your existing rate is lower than the rate on your new refinance loan. This may be the case if you borrowed in recent years when rates were near record lows. However, if your credit has significantly improved since you borrowed your home loan, you may qualify for a lower rate. You’ll have a choice of a fixed or variable rate with a cash-out refinance loan. While interest rates are typically lower on cash-out refinance loans than, say, a credit card or personal loan, you’ll pay more in interest than you would if you weren’t cashing out equity. And closing costs are often high, typically between 2% and 6% of the loan amount. If you itemize deductions on your taxes, you can deduct mortgage interest on loans up to $750,000. Interest may be deductible on home equity loans or lines of credit only if the funds are used to buy, build or substantially improve the property guaranteeing the loan. This restriction doesn’t apply to a cash-out refinance loan. Pros Cons Use the cash for any purpose without forfeiting tax benefits Fixed and variable rate options You may be able to lower your current mortgage rate Only one monthly payment to manage