How to cash out your home's equity
Are you in need of cash to consolidate debt, remodel your kitchen, or pay for your child’s education? Before turning to your credit card or taking out a personal loan, you may want to consider cashing out your home’s equity.
Home equity is the difference between the market value of your home and the amount owed on your mortgage. You build equity in your home simply by making your monthly mortgage payments. The more of your mortgage you pay off, the higher your home equity.
There are several financial tools you can use to cash out your home’s equity including a home equity loan, cash-out refinance, and a home equity line of credit (HELOC).
How to calculate your available home equity to cash out?
Determining how much home equity you have available for cash out is simple. Your home equity is the difference between how much your home is currently worth and your mortgage balance.
For instance, if your home is appraised at $300,000, and you have a mortgage balance of $100,000, then you have $200,000 in home equity ($300,000 − $100,000 = $200,000).
To ensure you have sufficient equity and to calculate the most you can borrow from that equity, lenders will often use your combined loan-to-value (CLTV) ratio. Your CLTV considers your loan amount plus your mortgage balance, divided by your home’s market value.
CLTV = (Loan Amount + Mortgage Balance) ÷ Home’s Market Value
If you have a mortgage balance of $100,000 and you want to take out a $50,000 home loan, if the market value of your home is $300,000, then your CLTV is:
($100,000 + $50,000) ÷ $300,000 = 0.50 (50% CLTV)
Many lenders will cap lending at 80% of your CLTV but Discover® Home Loans may permit home equity borrowing up to 90% CLTV for loan amounts between $35,000 and $150,000.
3 ways to get cash out from your home's equity
There are three main ways you can unlock the equity in your home including a home equity loan, cash-out refinance, and home equity line of credit (HELOC).
Home equity loan
A home equity loan, also referred to as a second mortgage, allows you to borrow against the equity you’ve built in your house. Typically, a home equity loan is given in a lump sum and has a fixed interest rate, fixed repayment term, and fixed monthly payments.
Since a home equity loan is a secured loan, you can usually get a lower interest rate and borrow more money than with an unsecured loan or a credit card. As an added bonus, the interest you pay on your home equity loan might be tax-deductible under certain conditions, such as if the money is used for a home renovation. Make sure you confirm this with your tax advisor.
In terms of how much you can borrow with a home equity loan, there are rules. Typically, your home equity loan combined with your current mortgage balance must be less than 85% of your home's value. Discover Home Loans lends less than 90% in certain circumstances.
A home equity loan can be a great option if you know precisely how much money you need and you want predictable monthly payments.
With a cash-out refinance, you can pay off your current mortgage with a new and larger mortgage. The difference between the new, larger mortgage, and your current mortgage is the amount of cash you can use. How much you are eligible for depends on the equity in your home.
For instance, if your home is valued at $300,000, and your remaining mortgage is $100,000, then you have $200,000 in home equity. You might choose to use a cash-out refinance to take out a new loan for $150,000, allowing you to pay off your original $100,000 mortgage while giving you $50,000 in cash.
To use a cash-out refinance, you will need to have your home appraised to determine the amount of equity you have in your home. Most lenders allow you to borrow up to 80% of your home's value but it can vary. For instance, if you have a Veterans Affairs (VA) mortgage, you may be eligible to borrow 100% of your home equity.
If you’re considering a cash-out refinance, you can check out cash-out refinance calculator by Discover to give you an idea of a mortgage rate you might have after refinancing.
A cash-out refinance can be a flexible source of cash and might be a good choice if your other financing options are more expensive. Before applying for a cash-out refinance, make sure you understand the details of your new loan terms (loan length, monthly payment amount) as they may change from your original agreement.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) functions like a credit card. You are given an account with a credit limit and you only borrow the amount of money you need. You only pay interest on the amount of money you are using.
A HELOC comes with a variable interest rate that can move up and down over time. Your monthly payments will vary based on how much you borrow as well as the interest rate. Similar to a home equity loan, the interest payments on your HELOC may be tax-deductible if the money is used to pay for a home renovation. Make sure you confirm this with your tax advisor.
A HELOC can be a good fit if you have an upcoming expense but you’re not entirely sure how much it will cost. While Discover offers home equity loans and cash-out refinancing options to cash out on your home’s equity, we do not provide HELOCs.
See if you can get cash out from your home's equity with Discover
Whether you’re trying to consolidate your debt, fund a home renovation, or achieve another financial goal, the equity in your home can be an excellent and flexible source of cash that offers better borrowing options than personal loans or credit cards.