Your house is worth more than what you paid for it: Here are 4 ways to tap into your home equity

My Comments: FULL DISCLOSURE… There’s a fifth way to use your home equity not described here, but you have to be age 62 or above. Why do I know this?

I recently passed a national exam and will soon be gainfully employed by a company called Top Flite Financial as a mortgage broker, specializing in reverse mortgages. Be prepared to indulge me as you follow these posts as I learn the ropes and fully explain what they are.

For the right person, they can be a fantastic device to have in retirement. For anyone doubting my judgement, I’ll be working locally with someone whose experience with reverse mortgages goes back decades. If you’re thinking about buying a new house and you’re old enough, talk with me.

Meanwhile, here is an article by someone with a more complicated Polish name than mine.

by Sarah Szczypinski \ 4 AUG 2021 \

Home prices are surging across the US. When the pandemic hit last year, millions fled major cities for more space in the suburbs, increasing demand and driving up prices. Meanwhile, material shortages inflated the price of new construction. Low inventory and cash-wielding house hunters continue to squeeze an already tight market even tighter: Now, new listings remain on the market for just six days on average and prices are expected to increase by approximately 18% by the end of the year.

These dynamics have combined to put many prospective homeowners — and some existing homeowners — in a precarious position, potentially priced out of the market where they live. But there have been winners, too. If the market value of your home is higher than the amount you still owe on your mortgage, you have a real opportunity to leverage that differential. Below are a few ways to harness your home equity. 

Refinance your mortgage

The number of people refinancing skyrocketed during the pandemic, according to Freddie Mac. Single-family refinances totaled $2.6 trillion in 2020 — the highest amount since 2003. If you haven’t looked at your interest rate recently, stop reading and do it now. 

Refinancing can help you snag a lower interest rate, which can shorten your loan term, shave down your monthly payment and reduce the overall cost of your mortgage. It can also help you wriggle out of paying private mortgage insurance (PMI) if increased home value has grown your equity past the 20% threshold. Refinancing can also provide a way to consolidate high-interest debt, like a credit card balance, or take cash out to finance a renovation or improvement. 

Get a home equity loan

These secured loans let you borrow a lump sum against your home equity. The specific loan terms depend on all of the usual financial credentials — your credit score, debt payment history and income — and lenders generally require at least 15% equity to qualify. Home equity loans typically feature a fixed interest rate, but repayment periods can vary (though most are for 15 or 20 years). 

To secure the best terms, the Federal Trade Commission (FTC) recommends negotiating with multiple lenders and allowing them to compete for your business. Negotiable items might include lower fees, mortgage point prices and the fixed interest rate. 

Open a home equity line of credit (HELOC)

This revolving line of credit, which features a preset limit and variable interest rate, lets you withdraw, pay back and then withdraw again (if you like). Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 85 percent of the appraised value of your home, less the amount you owe on your mortgage. When you need cash, you can write a check or use the credit card attached to the HELOC account. Like other types of credit cards, you cannot spend more than the credit limit, and HELOCs typically come with the highest interest rates since they are variable and the loan is a type of revolving credit.

Cash-out refinance

In essence, a cash-out refinance lets you borrow a lump sum of money at a fixed — and right now, a potentially very low — interest rate. Rather than attaching a second loan to your original mortgage like a home equity loan, this loan pays off your first mortgage and replaces it with a new one that includes some amount of cash. You may be able to borrow up to 80% of the loan-to-value ratio, which means that after subtracting the cash-out, you’ll still have 20% equity in your home.

Cash-out refinance loans usually have better interest rates than home equity loans because they are repaid before home equity loans during bankruptcy or foreclosure. Still, your specific terms will depend on your credit score, home value, income, and other factors. A knowledgeable mortgage broker should be able to help you weigh the pros and cons of each. 

Sell your house

The most obvious way to tap into your home equity is to sell. If there’s excess money after you pay off your mortgage, you could use it to finance a cross-country move or a down payment on a new house. In May, the Wall Street Journal reported that more than seven million households moved to a different county during the COVID-19 pandemic in 2020 — nearly half a million more than in 2019. Remote working options and the desire for more space spurred a mass exodus from dense metropolitan areas into more affordable areas.

If your home’s new value has you feeling like cashing in, keep a few things in mind before calling a listing agent:

  • Prices are higher — nearly everywhere. The real estate market may look different than the last time you shopped for a house, and it’s a good idea to learn what you can afford in your chosen location. Check out the National Association of Realtors’s (NAR) breakdown of median prices by home type and metropolitan area to see where you stand. You should also look at the latest mortgage interest rates and use our mortgage calculator to estimate your monthly payment on a new loan. 
  • Competition is fierce. We learned that most homes stay on the market just shy of 7 days, which means that you’ll need to make decisions quickly when it’s time to buy. One way to speed things along is to get a mortgage pre-approval before you start shopping. Preapproval allows your realtor to submit an offer immediately, which could make all the difference in a competitive market. 
  • A home equity windfall is rare. The US hasn’t seen a housing boom like this in nearly 25 years. Although selling your home could drastically increase your net worth, it’s wise to consider all of your options before buying another property. Consult a financial advisor about the different ways to use a financial windfall, real estate included.