How to Take Equity Out of Your 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. After building enough equity, you can decide to leverage it by taking out a home equity loan for debt consolidation, home improvement, education or other needs. Follow these steps when you are ready to start the process to access your equity:
1. Know 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 for $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.
Many lenders use a CLTV ratio to place a maximum limit on how much you can borrow. Discover® Home Loans allows borrower to take loans less than 90% CLTV.
Using the same example as above, multiplying your $300,000 home value by 90% gives you a maximum 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 below 90% CLTV: under $120,000.
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.
2. Know the types of home equity loans
While home equity loans are a common way to use your home’s equity to receive financing, other ways to tap your home’s equity include home equity lines of credit and cash-out refinancing.
a. Home equity loans
Home equity loans offer fixed interest rates for the life of the loan and repayment terms ranging from 5 to 30 years. A home equity loan is distributed as a single lump-sum payment that starts the loan’s term.
Discover Home Loans offers home equity loans from $35,000 to $300,000.
b. Home equity lines of credit (HELOC)
HELOCs, unlike home equity loans, typically use a variable interest rate that can fluctuate over the life of the loan, based on national economic factors. 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 can make budgeting challenging when compared to a more stable home equity loan.
While Discover Home Loans does not currently offer a HELOC, its home equity loan can be a great alternative. A home equity loan with Discover Home Loans allows you to consolidate your variable rate HELOC and lock in a low fixed rate.
Restructuring your original mortgage with refinancing can help you lock in lower interest rates or change your repayment terms to either increase or reduce monthly payments
c. Cash-out refinancing
Restructuring your original mortgage with refinancing can 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 have the ability to “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 increase the amount of cash you can receive.
Discover Home Loans offers a Mortgage Refinance that allows you to take out $35,000 to $300,000 with low, fixed rates. Unlike many conventional cash out refinances, Discover’s refinance comes with zero origination fees, zero application fees, zero appraisal fees, and zero cash due at closing.
3. 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.
See Discover Home Loans home equity loan rates here.
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.
Our monthly payment calculator allows you to compare the monthly costs of your entire loan, showing how your monthly payments change as you select different repayment terms.
Compare closing costs
You can now figure out how much you will have to pay in interest charges and loan repayment, but lenders typically include additional costs for originating the loan that can range from 2% to 5% of the entire loan amount. These fees vary by lender but can include:
- Application fee
- Credit report fee
- Processing/underwriting fees
- Home appraisal fee
- Tax service fee
- Title search/insurance fees
- Recording fee
Discover Home Loans pays these charges for you at closing which reduces your loan costs and make closing your application simple.
4. Select a lender and apply
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 increase your 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 previous 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.
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