How To Get Equity Out Of Your Home: What’s The Best Time To Use Your Equity?

Your home is one of your biggest assets, and buying a home is likely one of the most important investments you’ll ever make. Home is where you build your life, but by using your home equity, your home can also help you achieve significant life goals.

There are a number of ways to take equity out of your home when you need it. The most common way to leverage your equity is through a cash-out refinance, a home equity loan or a home equity line of credit (HELOC).

Let’s take a look at what equity is, common loan types and the best times to tap into your home’s equity.

What Is Home Equity?

Your home equity is your home’s current value minus the amount you still owe your mortgage lender. When you make your monthly mortgage payments or the value of your home increases, you build home equity. You can tap into this value if you need to borrow money and want to do it at a competitive interest rate.

How To Calculate Home Equity

To see how much equity you have in your home, look at the difference between your home’s worth and your mortgage balance. If your current home value is $400,000 and you owe your lender $250,000, you’ll subtract the amount you owe from your home’s value. This will give you the total amount of equity you have in your home. In this case:

$400,000 – $250,000 = $150,000

You can access a portion of the $150,000 by borrowing money with a cash-out refinance, home equity loan or HELOC. 

Loans For Taking Equity Out Of Your Home

Borrowing from your own equity can be a great way to get any money you may need – usually at a lower interest rate than you’d pay on a credit card or a personal loan. If you’re looking to borrow equity from your home, you have a few options.

Let’s take a look at some of the most popular ways that people access equity in their home.

Cash-Out Refinance

A cash-out refinance is a way to take equity out of your home while replacing your existing mortgage with a new one. This method of tapping into your equity requires having only one monthly mortgage payment. Cash-out refinancing is great for taking out a lump sum to use for renovations, medical bills or other large expenses.

Your new monthly payment will be shaped in part by interest rates at the time of your refinance. By borrowing money, though, you’ll likely increase your mortgage payment since you’re increasing the size of your loan. Keep in mind, too: With this loan type, you’ll need to pay some closing costs.

With a cash-out refinance, you can generally borrow up to 80% of your home’s value, but this amount can vary by lender and loan type. For example, most lenders will allow you to borrow up to 100% of the equity in your home with a VA loan refinance.

Home Equity Loan

A home equity loan is another loan type that allows you to take out a lump sum using your home as collateral. Home equity loans are a type of second mortgage that requires you to pay a second monthly payment.

As a secured loan, a home equity loan uses your house as collateral to secure the loan in the event of a default. One benefit of a secured loan is that it will typically offer a lower interest rate than an unsecured loan requiring no collateral. This saves you money, but you risk losing your collateral – in this case, your home – if you’re unable to make your payments.

Like a cash-out refinance, you pay closing costs for a home equity loan. You also get your payment as a lump sum. Home equity loans generally have a higher interest rate than a cash-out refinance, but you’ll typically pay a fixed interest rate. That means your payments stay consistent and your interest rate doesn’t change.

HELOC

A HELOC is also a type of second mortgage, but it works differently from a home equity loan. Home equity lines of credit are more similar to credit cards in that you can borrow what you need over time on a revolving basis instead of receiving one large payment.

HELOCs customarily feature a draw period where you can borrow money as needed and make at least a minimum payment each month. During the draw period, you can use and pay back this money several times up to the loan limit. This is followed by a repayment period, where you pay off any outstanding balance.

People who want flexible spending often use HELOCs. For example, they’re a popular loan for those looking to flip houses. Since you’re borrowing money over a period of time, a HELOC is likely to have an adjustable interest rate.

What’s The Best Time To Take Equity Out Of Your Home?

The best time to take equity out of your home is generally when you’ll be able to use the money to make significant improvements that add value to your home.

However, lots of factors can influence the best time for you to take advantage of your home’s equity. Now, let’s explore some common reasons to pull equity out of your home.

When Making Home Improvements Or Repairs

Equity-based loans are best when reinvested in your home. Most any improvement on your home should increase your home’s value, if only slightly. Some improvements may even save you on utility costs. For example, try cost-effective upgrades like adding insulation or replacing old windows with more energy-efficient ones.

Repairs like replacing a leaking roof can be time-sensitive and crucial for maintaining your home. If you don’t have the emergency funds, tapping into your equity with a home equity loan might be the right solution. Some repairs can cause serious damage to your property if ignored and boost your home’s value when handled appropriately.  

When Debt Consolidation Is Crucial

Debt consolidation might be a good option if you have credit card debt, student loans or other high-interest debt. Juggling a lot of accounts can be confusing and lead to missed payments and a low credit score. So, when is it a good idea to use your equity for debt consolidation?

After resolving spending issues. You also want to have good credit and a stable income, which will help you get the best rate and make payments on time.

If you’re a homeowner with past overspending problems and you’re consolidating debt, make sure you have a stable budget before moving forward. It’s important to keep up with all payments on home loans to avoid foreclosure.

For Emergency Expenses

Being hit with large, one-time emergency expenses might also prompt you to consider a cash-out refinance or a home equity loan. These loans are ideal if you need a lump sum to pay for an emergency surgery or another major medical expense. Securing a cash-out refinance or a home equity loan could be especially crucial if you don’t have an emergency fund.

However, in the case of an ongoing emergency, a HELOC might make more sense. This type of loan can help your financial situation over time by allowing you to pay back the debt in a flexible manner as needed.

When Interest Rates Are Low

If you have some financial flexibility, the best time to take equity out of your house is when interest rates are low. Low federal fund rates reduce interest rates on home loans. Financially speaking, this is the perfect time to borrow since you repay less interest over time. You can maximize this approach if you’re planning to use a fixed-rate loan.

This can be a great way to maximize your return for planned expenses like a renovation project or the costs associated with starting a business. Unexpected expenses are a part of life, so waiting for a low interest rate isn’t always possible or even practical. Ultimately, the best time to borrow will be when you can use your equity to achieve your goals.

FAQs On Taking Equity Out Of Your Home

How much equity can I take out of my home?

You can generally take up to 80% of the equity out of your home. The amount of equity you can withdraw varies by lender and loan type. Most lenders require you to keep your loan-to value-ratio (LTV) at or below 80% so you still have money invested in your home. 

Do I have to pay back equity?

Yes, you’ll need to pay back equity for a home equity loan, cash-out refinance or HELOC. The repayment schedule and interest rate will vary depending on the loan type and the length of the loan. And, of course, your credit score influences your interest rate no matter which loan type you choose.

How soon can I take equity out of my home?

You can take equity out of your home immediately or only a few months after closing, depending on the lender. However, you’ll incur closing costs. So, it might be better to wait a while since you’ll need to pay some money upfront to pull equity out of your home.

The Bottom Line

The equity in your home can be an incredible tool for helping you achieve your financial goals and accessing a lower interest rate. Since your house acts as collateral for a cash-out refinance, home equity loan and HELOC, make sure you stay on top of payments for the best results. You can use these loan types to cover a range of expenses to suit your personal needs.