Using your home to make big moves through all life events
When you buy a home, you’re putting down roots — but you could also be building a financial resource that you could tap into years down the road. As you make payments toward your mortgage and your home’s value changes with the market, the equity you build could give you more flexibility for life’s unexpected twists and turns.
Whether you’re looking to renovate your home, send your kids off to college or are faced with an unfortunate situation, there may be ways to put that equity to work and help you navigate your next chapter. And no matter what the financial climate looks like, you could have options. Here’s what you need to know.
How home equity could give you financial flexibility
Home equity is the difference between what your home is worth and what you still owe on your mortgage. As you pay down your loan balance, your equity typically grows. This is known as building equity and offers one of the strongest financial benefits of investing in real estate.
If the real estate market goes up and your property value increases, that could add to your equity, too. But on the flip side, your equity could decrease if your home value falls.
Building home equity has become one of the most common methods for establishing wealth and ensuring a financially-secure future. You could leverage equity as a source of funds for a range of expenses, including home improvements, education costs or even debt consolidation. But first, you have to unlock it.
3 ways to tap into your home equity
If you have equity tied up in your home, how do you access it? Depending on your goals, finances and eligibility, you could tap your equity through a Home Equity Line of Credit, Home Equity Loan or a cash-out refinance.
Let’s go through the different ways you can tap into equity.
1. A home equity line of credit (HELOC)
HELOCs work similarly to a credit card. You’re given a line of credit backed by the equity in your home. Rather than receiving the funds all at once, you draw from the available credit as needed during a set draw period (typically 10 years). Options include interest-only draw periods or draw periods with both interest and principal.
But unlike a credit card, HELOCs tend to have an interest rate around ⅔ lower than most cards.* And you could get a HELOC with a combined loan-to-value (CLTV) ratio as high as 85% of your home equity. You may be able to qualify for as much as a $400,000 line of credit, depending on your eligibility qualifications.
We make HELOCs quick and easy, funding within 5 to 10 days.** The experience is 100% digital from application to closing and the process only takes about 5 to 10 minutes to complete.*** Fixed-rate term options include 5, 10, 15 or 30 years.
Depending on the term selected, you could draw funds from the line of credit for 2 to 5 years. And because all applicable fees are included in the loan amount, there’s also no money required upfront. And best of all, funding comes in as fast as 5 days.
2. A Home Equity Loan (HELOAN)
Also known as a “second mortgage,” a Home Equity Loan allows you to borrow against your equity. Unlike a HELOC, which gives you access to a line of credit, you typically receive one lump sum payment when you take out a HELOAN. Then, you repay the loan over a fixed term, generally at a fixed interest rate.
If you know how much you need to borrow upfront and prefer predictable payments, this structure could make sense for you.
3. A cash-out refinance
Lastly, a cash-out refinance (often called a cash-out refi) is a mortgage refinancing option that lets you replace your existing mortgage with a new, larger home loan and receive the difference in cash as a lump-sum payment.**** In other words, you’re converting a portion of the equity you’ve built into funds you could use for other financial needs.
But because a cash-out refinance replaces your current mortgage, it’s important to compare your new loan’s rate, payment and terms with what you already have. Like other refinancing structures, a well-timed cash-out refinance approach could result in a reduced interest rate, lowering the amount you’ll be required to pay each month.
You’ll want to make sure you have enough equity built up so that your cash-out refi won’t increase your loan-to-value ratio to over 80%. When your ratio exceeds this amount, you may need to purchase mortgage insurance.
What to consider before tapping your equity
Your home equity may offer flexibility, but borrowing against it is a major financial decision you shouldn’t take lightly. Your home serves as collateral, so it’s important to look beyond just the cash you could access.
Think about why you’re borrowing, how the new payment fits into your budget and what the loan could cost over time. It’s also a good idea to compare your available options, since a HELOC3, HELOAN2 and cash-out refinance each work differently.
Your Loan Officer is a helpful resource to guide you through the decision process, providing expert insights to help weigh your options and evaluate your specific situation.
When tapping home equity could make sense
There isn’t one right reason to use home equity, as everyone has unique circumstances. However, homeowners commonly consider tapping into equity to cover expenses like these:
If your home needs an upgrade
Whether your roof needs a repair or you want to redesign the kitchen, home projects often come with a significant price tag. Using your home equity for renovations means putting a portion of the value you’ve built back into the property. And depending on the project, the improvements could also increase your home’s future value.
If you’re managing high-interest debt
When high-interest debt is restricting your financial breathing room, your home equity could help you consolidate multiple balances into one streamlined payment. Plus, HELOCs and cash-out refinances typically offer a lower interest rate than most credit cards. Before moving forward, compare the total cost of borrowing and remember that unsecured debt becomes debt secured by your home when it’s rolled into a home equity product.
If your college savings account is growing, but not as fast as tuition
College is a high-cost endeavor, and between housing, tuition, supplies and other education expenses, the bill adds up quickly — even if you’ve spent years saving. If scholarships, financial aid and savings don’t cover the full cost, borrowing against home equity could be another option to consider.
If you’re thinking about using your home as collateral for education costs, be sure to compare home equity financing with other available borrowing options before moving forward.
If you have an upcoming celebration
Major life milestones like weddings could put pressure on your cash flow. Home equity may offer another source of funds if you want to avoid other higher-interest options. The lower rates on these home equity products give you one less thing to worry about so you can enjoy these once-in-a-lifetime events.
If you’re dividing assets in a divorce
Emotionally and financially, divorce can be complicated on many levels. But your mortgage doesn’t have to be. You have options whether you’re staying or selling. If you decide one of you wants to stay, you could refinance your joint mortgage.
For example, if you refinance the mortgage into your own name, you’ll factor in only your income and credit score, then cash out a portion of your equity to buy out and pay your spouse their share.
If you’ve just inherited property
Inheriting a home could leave you with several decisions to make, especially when multiple heirs are involved. You may decide to keep the property, sell it or explore financing options that allow one heir to retain the home while others receive their share of the estate.
The right move depends on the estate, existing liens or mortgage debt and how the property is distributed.
If retirement is right around the corner
As you fine-tune your 401(k) and retirement plan, don’t forget to consider one of your largest assets — your home. Whether you’re looking into downsizing, buying a second home or refinancing your current mortgage, you have options that could leave you with a lower interest rate or help maximize your tax savings.†
One option that’s exclusively available for older homeowners1 is a Home Equity Conversion Mortgage. HECM, which is a type of Reverse Mortgage. Instead of you paying a mortgage, this innovative product pays you, offering a fresh approach to managing your finances. You'll receive regular payments, establish lines of credit or even obtain a substantial lump sum, all from the equity you built in your home.
The mortgage application process is the same for both retirees and working adults. However, retirees will often need to set up an income stream or use their assets to demonstrate their repayment ability. This can be done by setting up periodic payments, which verify access to necessary funds. Assets can also be taken into consideration to satisfy an insufficient income.
Work with a home finance expert
Your home equity could open up several doors to help you handle whatever life has in store. But ultimately, the right one depends on what you want to accomplish and how each choice fits into your larger financial picture.
Consider your goals, compare the costs and, most importantly, speak with a licensed Loan Officer to map out a custom plan.
Our digital application process offers a streamlined way to explore HELOC and cash-out refinance options. Depending on the product and your eligibility, you may be approved for a line of credit within minutes and your funds could be deposited into your bank account within 5 to 10 days.**** If you have the home equity available, there’s no need to delay making a big move.
* Source: Average credit card interest rate is 24.96% (Forbes) vs. our HELOC starts at 8.35% (subject to change) – which is 70% lower.
** Approval may be granted in five minutes but may be subject to verification of income and employment. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and may need to order a desktop appraisal to confirm the value of your property.
*** During Rate's Digital HELOC process, the borrower and/or Rate may need to communicate or facilitate the origination and closing of the borrower’s HELOC using non-digital methods, including but not limited to telephone or letter. There may be instances, due to borrower preference, applicable law, or other reasons, in which HELOC closing must occur in person. Additionally, Rate makes no representations and cannot guarantee that borrower’s HELOC will be serviced by a servicer that maintains an entirely digital process.
**** 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 principal amount and will be paid off over the full loan term. Contact Rate for more information.
† Rate does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.
1For borrowers 62+. Must pay property tax, homeowner’s insurance, and HOA dues (as applicable) while maintaining the home and using it as a primary residence. Not affiliated with any government agency. Find a reverse mortgage counselor at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call (800) 569-4287. Go to https://www.rate.com/hecm-reverse-mortgage for important information about eligibility restrictions and requirements.
2 Available as closed end, fixed rate, second lien. Restrictions regarding debt to income, loan amount and total number and/or value of liens and financed properties applies. Minimum equity and FICO score requirements apply. Existing first lien must be fully amortizing fixed rate or adjustable rate mortgage. Not available in all states. Not all applicants will be approved. Applicant subject to credit and underwriting approval. Not a commitment to lend. Contact Rate for more information.
3 Rate’s HELOC is a fixed-rate open-end product using your home as collateral. Not available in all states. Go to Rate.com/HELOC for information including important property and borrower requirements and restrictions which impact rate and max available loan amount. Subject to approval.
