How to get equity out of your home

Which home equity financing option is right for you? 

Considering a home equity loan, HELOC, or cash out refinance? You may want to carry out the following steps before deciding on the best option for you:

1. Assess your needs: First things first, figure out what you actually need home equity financing for. Are you dreaming of a picturesque backyard deck? Wanting to pay off high-interest debts? Planning to take a well-deserved vacation? Identifying your financial goals and priorities may steer you in the right direction when it comes to picking the right option for your situation.
2. Crunch the numbers: Calculate the potential costs, including interest rates, closing costs, and any other fees that may be associated with each option. You may want to use our monthly payment calculator, which compares monthly payment amounts for home equity loans and cash out refinances from Discover at different loan term lengths. Also, don't hesitate to reach out to lenders for personalized quotes to get the most accurate picture possible.
3. Determine the risks involved: Every financial decision may involve some level of risk, and home equity financing is no different. Consider factors like your future income stability, fluctuations in interest rates, and how comfortable you are with potential changes in your monthly payments. Assessing the risks associated with each loan option may help you make an informed decision that aligns with your risk tolerance.
4. Seek expert advice: Remember that you don't have to navigate these waters alone. When in doubt, contact a trusted financial advisor or mortgage professional. They may help you break down the details of different loan options, address any concerns, and guide you toward the best choice for your financial future.

Why take equity out of your home?

Here are some reasons you may want to access your home equity:

1. Home improvements and renovations: Have you ever imagined what your kitchen might look like with shiny new appliances? Or have you dreamed about turning your basement into a state-of-the-art entertainment hub? By tapping into your home equity, you may be able to turn your dreams into reality and transform your living space.
2. Debt consolidation: Are you juggling multiple high-interest debt payments? By taking equity out of your home with a loan, you may be able to consolidate all those bills into a single monthly payment.
3. Education expenses: Utilizing your home equity may provide you or a loved one with the needed funds for tuition, books, or other education-related costs. 
4. Emergency situations: Life can throw unexpected curveballs our way. From medical emergencies to unforeseen home repairs, having quick access to funds may provide peace of mind and help you handle financial surprises.
5. Entrepreneurial ventures: Are you an aspiring business owner with big dreams of launching your own venture? Borrowing against your home equity may help you get your ideas up and running. It may also provide much-needed funds if you have an existing business.

Remember, taking equity out of your home is a serious decision and should be carefully considered. Always think about the potential risks, consult with financial advisors when you have questions, and make sure you can comfortably manage your loan payments.

Advantages of taking out home equity financing

1. Low interest rates: Home equity financing is secured using your home as collateral. Secured loans may come with lower interest rates than unsecured loans.  
2. Access to funds: With a home equity loan, you can receive a lump sum of money upfront. This may help if you have a specific goal in mind, such as paying off a large bill. A cash out refinance works similarly but involves refinancing your existing mortgage with a new, larger one. You receive the difference between these amounts in cash. With a HELOC, you can access funds when you need them during the initial draw period.
3. Several repayment options: Home equity financing products may come with different repayment terms depending on the lender you choose. You may have the opportunity to select a repayment term that suits your budget, such as a longer-term length with a lower monthly payment or a shorter-term length with a higher monthly payment. 
4. Potential tax benefits: The home mortgage interest deduction may allow you to deduct all or some of the interest you pay on a home equity loan, HELOC, or cash out refinance from your taxable income. To qualify for this deduction, you must use the borrowed funds to "buy, build, or substantially improve" the property that secured the loan, according to the IRS. Consult with a tax professional to learn more about this deduction.

Disadvantages of taking out home equity financing

1. Collateral risk: Home equity financing uses your home as collateral. This means your property may be at risk of foreclosure if you fail to make payments. It's important to consider the risk involved and make sure you can comfortably manage repayment terms.
2. Closing costs and fees: Depending on the lender you choose to work with, there may be additional upfront costs to taking out home equity financing, such as appraisal fees, application fees, and origination fees. Factor these costs into your decision-making process, and research and compare different lenders. You may find an option with no closing costs or fees.
3. Long-term commitment: Home equity financing may take a significant amount of time to pay off. Make sure you're ready for the commitment and consider your future financial plans.
4. Possible overspending: Once you have access to your full loan amount, it may be tempting to indulge in spontaneous shopping trips or to treat yourself to something extravagant. Remember that your loan needs to be repaid, and overspending may lead to financial hardships down the road.