When is the best time to take equity out of your home?
The best time to take equity out of your home depends on you, your financial situation and how you would like to pay back your loan. Understanding how home equity works and ways you can access it can help you decide when the best time is to take equity out of your home.
Home equity is the amount of home you own outright. You can determine your home equity by subtracting your remaining mortgage balance, if you have one, from your home’s current value. If you do not have a mortgage, your home equity is 100%. You can access your home equity through a HELOC, home equity loan or cash-out refinance.
If you are looking to access your home equity, you can begin by completing an online application with Rate.
How does taking out equity work?
Several loans allow homeowners to access the equity they have built up in their homes. The three loans that do this are a HELOC, home equity loan and cash-out refinance. Here’s how taking equity out of your home works with these loans.
HELOC
A home equity line of credit, or HELOC, typically works in two parts. The first part lets you draw on a line of credit based on the equity that you own in your home. During this first part, you only need to pay interest on the amount you borrow. While you are in the second part of your HELOC, you cannot make additional draws and will have to pay your loan principal as well as interest on your loan.
Home equity loan
With a home equity loan, you will receive a lump-sum amount based on the equity you have in your home, when closing on your loan. You will need to start repaying your home equity loan amount shortly after receiving your funds.
Like a HELOC, a home equity loan works as a second mortgage, so you will have to repay your loan on top of any mortgage you may have.
Cash-out refinance
A cash-out refinance is not a second mortgage but will replace your original mortgage. A cash-out refinance offers you a loan with a larger amount than on your current mortgage. The amount you get with this mortgage is used to pay back the remainder of your current mortgage with you pocketing the leftover funds.
The best times to take equity out of your home
These are some of the best times homeowners have chosen to take equity out of their home.
To finance home improvements
Home improvements could potentially boost your home value and equity you have in your home, making it a great use of your current home equity. A HELOC is a popular option for home improvements as in case unexpected expenses arise, you can make additional draws to cover costs.
Using your home equity to finance home improvements can help you qualify you for tax benefits on the interest you pay toward your loan.
To consolidate high-interest debt
If you have multiple high-interest debts, your home equity may help consolidate them and even reduce the amount of interest you pay.
Using your equity can consolidate high-interest debt under one monthly loan payment. If the interests you have to pay on these debts are higher than the interest you are approved for with a loan that accesses your home equity, you could reduce the interest you pay when consolidating.
To cover major expenses
Some major expenses are unavoidable and can be unpredictable. Whether these expenses are planned or not, when they come up, your home equity is available to help you cover them.
To purchase a second home or investment property
If you are looking to help fund the purchase of a second home or investment property, you can use the equity you have in your current home to put toward a down payment.
Saving for a down payment can be one of the trickiest parts of buying a home, especially if you are putting money into your current mortgage. If you own a home and are looking to purchase a second property, your home equity is available to help you make a down payment.
How to qualify for a home equity loan or HELOC
If you are looking to get a home equity loan or HELOC, you will need to meet the qualifications set by a lender. While qualifications can vary slightly among lenders, here are some of the standard requirements you will need to meet.
Equity requirements
If you are trying to access your home equity through a HELOC or home equity loan, you will need to have 15% to 20% equity in your home.
You can determine how much equity you have in your home by subtracting your mortgage balance from your home’s current value. Divide the number you get by your home’s value and multiply that number by 100. That number is the percent of equity you have in your home.
Credit score
The credit score you will need to have can vary depending on if you are looking to get a HELOC or home equity loan.
Home equity loans will require a minimum credit score of 660, while a HELOC allows a slightly lower credit score of 640. However, higher credit scores for either option could get you a better rate on your loan.
Income and debt-to-income ratio
Your debt-to-income (DTI) ratio is an important part of getting a loan as it informs lenders how much of your current salary is accounted for in paying other bills. For both loans, lenders tend to look for a DTI ratio of 43%, though some lenders will approve borrowers who have a maximum DTI ratio of 50%.
Explore home equity solutions with Rate
If you are ready to start accessing your home equity, you can begin with an online application through a trusted lender, like Rate.
Online application with us will connect you with a professional Loan Officer who can help you with your home equity application. A Rate Loan Officer can answer any questions you may have about your application, look at your financial situation and advise you on what loan could work best for you and your needs.
Begin exploring home equity when completing your Rate online application.
