Last updated: April 08, 2024

Home Ownership

How to get equity out of your home

Family of four that accessed their home equity with a home equity loan enjoying their beautiful home.

The home you own provides shelter, security and comfort for you and your family.

Your home is also an investment that may provide a financial return with appreciation in price when you decide to sell it. In fact, your home may also be the biggest asset that you have.

What is home equity?

Home equity is the difference between your home’s current market value and the amount you still owe on your mortgage. It represents the part of your home that you truly own, free and clear. After building enough equity, you may decide to leverage it by taking out a home equity loan for debt consolidation, home improvement, education or other needs.

How to pull equity out of your home

While fixed installment home equity loans are a common way to use your home’s equity, other ways to tap your home’s equity include home equity lines of credit (HELOCs) and cash out refinancing.

Home equity loans

Home equity loans offer fixed interest rates for the life of the loan and repayment terms typically ranging up to 30 years. A home equity loan is distributed as a single lump-sum payment that starts the loan’s term. Because of the combination of fixed terms and fixed interest rates, you can know exactly how much your home equity loan monthly payment will be throughout the life of the loan.

Home equity lines of credit (HELOCs)

HELOCs, unlike home equity loans, typically use a variable interest rate that can fluctuate over the life of the loan, based on economic conditions. HELOCs typically include a draw period, where the borrower can receive funds up to their HELOC borrowing limit and only pay interest on what they borrow.

When the draw period closes, the repayment period begins, where the repayment of the principal is added to the interest payments. While the flexibility of HELOCs allows borrowers to withdraw only as they need, the movement of the variable rate combined with the differences in monthly payments during the draw period and the repayment period may make budgeting more complex when compared to the stability of a home equity loan with a fixed monthly payment.

Cash out refinancing

Restructuring your original mortgage with refinancing may help you lock in lower interest rates or change your repayment terms to either increase or reduce monthly payments as you prefer.

When your refinanced mortgage loan is for a greater amount than you owe on the original home mortgage, you could “cash out” the additional funds. Your ability to obtain cash out refinancing will largely depend on the amount of equity you already have in the home, which will impact the amount of cash you may be able to borrow.

Discover Home Loans offers low fixed rates on home equity loans and cash out refinances up to 90% combined loan-to-value (CLTV) with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.  

Which home equity loan is right for you?

If you’ve got enough equity built up in your home and you’re looking for a way for it to help you tackle some big expenses, the best financing option for you will depend on several factors.

  1. Assess your needs: First things first, try to figure out what you actually need this home equity financing for. Are you dreaming of a picturesque backyard deck? Itching to pay off other 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 perfect option for your unique situation.
  2. Crunch the numbers: Find your favorite calculator resource and do some math. Calculate the potential costs, including interest rates, closing costs, and any other fees that may be associated with each option. If you have a loan amount in mind, try using our monthly payment calculator. Compare the total amount you’ll pay over the loan term for each type of loan you’re considering. Don’t hesitate to reach out to lenders for personalized quotes to get the most accurate picture possible.
  3. Determine risks involved: Let’s talk about risk. 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, reach out to a trusted financial advisor or mortgage professional. They may help you break down the details, address any concerns, and guide you towards the best choice for your financial future.

Why take equity out of your home?

Home improvements, debt consolidation, and covering education expenses are just a few of the most common reasons why homeowners might want to access a portion of their home equity. Here’s a deeper dive into some of the reasons that you might consider turning your own home equity into cash in your pocket:

  1. Home improvements and renovations: Have you ever imagined what your kitchen might look like with shiny new appliances or how your basement could turn into a state-of-the-art entertainment hub? By tapping into your home equity, you may be able to turn those dreams into reality. With funds for a major home improvement project, you might be able to transform your living space into a magazine-worthy paradise and maybe increase the value of your home in the process.
  2. Debt consolidation: If it feels like you’re juggling multiple high-interest debt payments and finance charges, guess what? Your home equity could potentially come to the rescue. By taking equity out of your home with a loan, you might be able to consolidate all those bills into a single monthly payment with a low, fixed interest rate.
  3. Education expenses: Education can be a key to unlocking a world of opportunities. If you or a loved one is seeking higher education or pursuing advanced degrees, utilizing your home equity might provide the needed funds for tuition, books, or other education-related costs. This might grant you the peace of mind knowing that you’re investing in a brighter future without breaking the bank.
  4. Emergency situations: Life can throw unexpected curveballs our way. From medical emergencies to unforeseen home repairs, having quick access to funds may be a lifesaver. By tapping into your home equity, you might be able to establish a safety net to handle those financial surprises with ease.
  5. Entrepreneurial ventures: Are you an aspiring business owner with big dreams of launching your own venture? Your home equity might give you the boost you need to get your ideas up and running. It may provide the startup capital or much-needed funds to expand your 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 tapping into your home equity

  1. Low interest rates: Compared to other types of loans, home equity loans are secured using your home as collateral for the loan. This means that they typically come with lower rates compared to unsecured borrowing options like personal loans or credit cards. Lower interest rates mean you keep more money in your pocket over the life of the loan.
  2. Access to funds: With a home equity loan, you can receive a lump sum chunk of money upfront. This may work great if you have a specific financial goal in mind. A cash out refinance works similarly but involves refinancing your existing mortgage and borrowing additional funds from your available home equity that you receive in a lump sum. With a HELOC, you can access funds when you need them during the initial draw period defined by your lender’s terms.
  3. Flexible repayment options: Fixed rate and term home equity loans and cash out refinances come with varying term lengths depending on the lender you choose, so you have the opportunity to select a monthly payment that works with your budget. HELOCs work differently due to typically coming with variable interest rates, but they also allow you to pay off your balance to use it again like a credit card. This is the case with the draw period of a HELOC. When that period ends and the HELOC repayment period begins, you can typically expect to make monthly payments on a consistent amount of the principal balance plus variable interest rate charges.
  4. Potential tax benefits: In some cases, the interest you pay on a home equity loan may be tax-deductible. This means potential savings come tax season. Make sure to consult with a tax professional to understand how this applies to your situation.

Disadvantages of taking out a home equity loan

  1. Collateral risk: A home equity loan uses your home as collateral. This means it might be at risk of foreclosure if you can’t make your minimum monthly payments. While you wouldn’t want to dwell on worst-case scenarios, it’s important you to consider the risk involved and make sure you can comfortably manage the repayment terms.
  2. Closing costs & fees: Depending on the lender you choose to work with, there may be additional upfront costs to taking out a home equity loan. Examples of these might include appraisal fees, application fees, origination fees, or other costs required at closing. While these costs shouldn’t discourage you, you may want to factor them into your decision-making process. Research and compare different lenders in your search for a home equity loan – you may find an option with no closing costs or fees on the loan amount you want to take out.
  3. Long-term commitment: Home equity loans may take a significant amount of time to pay off – potentially up to 30 years. It’s like being in a long-term relationship with your loan (and your lender). Make sure you’re ready for the commitment and consider your future financial plans.
  4. May encourage 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. But be cautious with your budget – remember that this loan needs to be repaid, and overspending may lead to financial hardships down the road.

Find out how much you can borrow

To find how much equity you have in your home, you should know:

  • your home’s current value
  • the remaining amount of your home’s mortgage loan
  • the amount of any additional loans against your equity

For example, if your original mortgage loan was $200,000 and you paid off $50,000 through your monthly mortgage payments, you would still owe $150,000.

If your home is currently valued at $300,000, subtracting the amount owed from the home’s value equals your available equity: $150,000 in this example.

Add your mortgage, any other loans that you have against your equity, and your potential loan amount. Then divide this value by the value of your home. This is your combined loan-to-value (CLTV) ratio.

Using the same example as above, we can estimate the amount that you may be able to borrow using the Discover Home Loans lending limit of up to 90% CLTV. Multiplying your $300,000 home value by 90% gives you a maximum total loan of less than $270,000. Because you already have an existing $150,000 mortgage loan, subtracting $150,000 from $270,000 gives you the most you can borrow from a new loan up to 90% CLTV: under $120,000.

You can replace the example amounts above with your own data to see how much you can borrow or enter your details into our loan amount calculator to let us take care of the math.

Compare home equity lenders and rates

  • Evaluating home equity loan interest rates: Knowing the amount you want to borrow, coupled with your credit score, can allow lenders to generate your home equity loan interest rates. Lower loan amounts, larger amounts of equity, and higher credit scores are less risky for lenders, so they earn lower interest rates, where higher borrowing, lower levels of equity, and lower credit scores can push interest rates higher.
  • Look at available home equity loan terms: Interest rates add to the total cost of your loan each month, so the longer you take to repay the loan, the more interest charges you will accrue. Discover Home Loans offers home equity loan terms of 10, 15, 20, and 30 years, allowing you to pick a repayment term that either minimizes interest charges (a shorter term) or spreads out the loan to lower your monthly payments (a longer term). For example, if you borrowed $60,000 for a 20-year term at 8.99% APR, your fixed monthly payments would be $539.45.

Select a lender and apply for a home equity loan

Knowing how much equity your home currently has, how much of that equity you are eligible to borrow, what interest rates are for home equity loans, options for repayment terms, and potential closing costs can help you evaluate home equity loan offers from competing lenders.

When you find a lender that provides low interest rates, terms that match your needs, and affordable closing costs, you can begin the application process online without providing documentation.

As you progress through the application process, the lender will require you to provide documents to confirm your identity and your income, details and documentation for your home, and additional documents that may affect your ability to repay the loan.

How to build your home equity

If you find that your amount of equity doesn’t meet your financial needs, increasing your equity may increase the amount you can borrow. To increase your equity, you must either:

  • Reduce the amounts you owe on your mortgage loan or
  • Increase the value of your home.

Making extra payments on the principal of your mortgage can help you increase your equity, and it may also help shorten the term on your original mortgage and reduce the interest you pay over the life of the loan.

A new assessment of your home may be able to increase your previously assessed value, but another method is to invest in home improvements. By adding square footage to your home or renovating your kitchen or bathrooms, you can add value to the home that will later be available through equity financing.

After you’ve explored the advantages and disadvantages of taking out a home equity loan, you may have the knowledge to decide if it’s the right financial move for you. Remember that everyone’s financial journey is unique, so consider your specific circumstances, assess your goals, and consult a trusted financial advisor on your way to making the best decision possible.

Please note: Discover Home Loans offers home equity loans and mortgage refinance opportunities, but does not offer HELOCs.  

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