Updated March 15, 2019.
It’s how much your house is worth minus how much you owe on your mortgage. Your home equity builds over time, and according to the latest headlines, you might be among the “equity rich.” That means you can use your house to fund the other things in life you want — like college tuition, renovations, or your daughter’s dream wedding.
Right now, rising home prices are all over the news, and while many housing market experts question the sustainability of rapid price increases that can affect buyers, we can’t forget that homeowners benefit. One of the frequently-overlooked advantages of rising housing prices is their ability to boost home values (and equity along with it).
As ATTOM Data Solutions’ 2018 Equity Report explains:
“13.9 million U.S. properties in Q2 2018 were equity rich — where the combined estimated balance of loans secured by the property was 50 percent or less of the property’s estimated market value — representing 24.9 percent of all U.S. properties with a mortgage.”
So, there are currently close to a quarter of homeowners who are “equity rich” and could sell and have more than enough to put toward a sizable down payment. Many homeowners could also use the excess from this new equity boost to pay off high-interest debt or pay for kids’ college tuition. Read more here about how homeowners are cashing out responsibly and using their homes as ATMs and read more here about how homeowners could see a $40,000 equity boost in the next five years. Then read on to find out your options.
Why homeowners are cashing in home equity — and 7 ways you can too
Today, more financially-savvy homeowners are working to meet their financial goals by tapping into their mortgage. Here’s how:
1. Refinance your mortgage and pay for renovation.
Loan type: Refinance
How it works: Depending on how much home equity you have (and whether or not you’ve reached your break-even point), your loan officer may suggest a mortgage refinance. In a nutshell, refinancing your mortgage allows you to replace the existing mortgage on your house. You’ll use a new loan to pay off your current mortgage, potentially changing the loan amount, loan term, and interest rate. You could cash out the extra funds to pay for expenses, financial goals, or — you guessed it — renovation.
How you benefit: A cash-out refinance could allow you to tap into your equity at up to 80 percent of your home’s value. In an ideal scenario, you could use your home equity to pay for a home renovation project that would further improve the market value of your house. A win-win. Doing a minor kitchen remodel, for example, currently has one of the highest ROIs for home upgrades at 80.5 percent. Successfully executing repairs or a renovation project can also benefit you directly by giving you more to enjoy in your home — like an upgraded kitchen, a new roof, a backyard pool, or a garage converted into a mother-in-law suite — without having to move. Right behind debt consolidation, home improvements are one of the most popular uses for home equity.
Get your mortgage questions answered by your loan officer on the fly? No, it’s not too good to be true.
2. Refinance your mortgage and pay for college.
Loan type: Refinance
How it works: You can also consider a cash-out refinance — securing a new loan for more than your current balance to receive the difference in cash — to pay for education, whether you’re helping out children or grandchildren or going back to school yourself. Or, you can use the cash available after refinancing your mortgage to start a college fund for the future. Alternately, refinancing to reduce your interest rate and lower your monthly payments could give you enough wiggle room to start contributing to a college fund each month.
How you benefit: Most refinancing homeowners love the fact that refinance cash isn’t restricted. So, it could pay for school tuition, room and board, a computer, books, and more.
3. Swap out your mortgage and cash out the difference.
Loan type: Refinance
How it works: In this scenario, you can use a cash-out refinance as it was intended: to get your hands on cash to pay for a large or unexpected expense or to create an emergency fund. Depending on your refinance options and available home equity, as well as the current housing prices in your area, you may have access to $10,000, $20,000, or more. The average homeowner saw $9,700 in home equity gains over the past year, according to CoreLogic’s 2019 Home Equity Report.
How you benefit: These funds can pay for a wedding, family vacation, or another big expense. However, before making a major purchase, it’s always a good idea to check in with your financial advisor. Most financial professionals won’t recommend using home equity to buy an asset that depreciates quickly, like a new car.
4. Cash out your mortgage and pay down your debt.
Loan type: Refinance
How it works: Again, with a cash-out refinance, there’s no restriction on how you use the money. Consolidating high-interest debts, including credit card and student loan debt, is another popular use for this type of refinance. Refinancing, the National Foundation for Credit Counseling explains, can also be used to consolidate student loan debt after marriage. The NFCC recommends credit counseling before taking this step.
How you benefit: Along with using it for debt consolidation, a cash-out refinance can come with other benefits that make it advantageous over the long-term. Like a lower interest rate or a shorter loan term compared to the original mortgage. The standard balance for a cash-out mortgage will exceed the original balance by 5 percent or more.
5. Get a reverse mortgage and pay for retirement.
Loan type: Reverse mortgage
How it works: A home equity conversion mortgage (HECM) is also called a reverse mortgage. This home loan program is available to homeowners ages 62 and older who qualify, allowing you to convert your existing home equity into cash. Depending on HECM loan terms, options for reverse mortgage funds may be available as a lump sum, a line of credit, a monthly payout, or a combination. A reverse mortgage also needs to be paid back.
How you benefit: With a reverse mortgage, you’ll receive a portion of your home equity funds tax-free. Again, there are no restrictions on these funds. You can supplement retirement income, pay for emergency or healthcare expenses, pay off high-interest debt, finance home renovations, and more. The difference between a reverse mortgage and a traditional mortgage is that you’ll no longer have to make monthly mortgage payments. You’ll keep living in your home as your primary residence, paying property taxes, homeowner’s insurance, and maintenance, and can receive a monthly payout. A reverse mortgage payout can be helpful to the many older homeowners who are “cash poor but house rich,” often on a limited income, though the National Council on Aging recommends meeting with a HUD counselor before talking to a loan officer to review potential risks.
6. Use a home equity loan and pay for business or medical expenses.
Loan type: Home equity loan or line of credit (HELOC)
How it works: A home equity loan or a home equity line of credit (HELOC) are two other options available to homeowners along with mortgage refinance. Unlike a mortgage refinance (swap out with potential for cash out), a home equity loan is a second loan you can take out to tap into your home equity without needing to refinance. In comparison, a home equity line of credit is a revolving line of credit with your home’s value as collateral.
How you benefit: If you already have a low interest rate on your mortgage, you may not need to refinance. You could benefit from using a home equity loan instead. Your loan officer may also suggest using a home equity loan over a mortgage refinance if you have a sizable amount of home equity. In contrast, a HELOC works like a credit card. You can use your available credit line to pay for business or medical expenses, consolidate student loan debt, fund home renovations, and more.
7. Fix up your house and build home equity for the future.
Loan type: Renovation loan, refinance
How it works: Let’s say you’re not in a place to tap into your home equity. Don’t throw in the towel just yet. If you’re buying a new house, you can use a home renovation loan to purchase a fixer-upper for the purpose of building equity. You can also use a renovation loan to refinance and improve your home’s value and equity by making upgrades. For example, the HomeStyle® Renovation Program can finance renovations at up to 50 percent of a home’s as-completed value; the FNMA Postponed Improvements Program can finance renovations at up to 25 percent of a home’s value after improvements; and the FHA 203(k) has a repair maximum of $35,000 for the Limited program or set at a county’s FHA loan limit for the full program.
How you benefit: A renovation loan rolls the cost of home repairs into the cost of refinancing or buying a house. An all-in-one loan program like this helps to limit out-of-pocket repair expenses. It often comes with a lower interest rate and down payment requirement compared to many other loan types. Using a renovation loan, you get both worlds. You can upgrade your home without moving and build your equity quicker.
5 fast facts about home equity can help it all make sense
Remembering these home-equity basics can help you understand your assets and plan for your next stage in life:
- Home equity is the difference between the current value of your house and the amount left owed on your mortgage. For example, if your home is worth $250,000, and your current home loan balance is at $150,000, then your home equity is $100,000.
- Home equity takes time to build. It can take several years to get to what many loan officers refer to as the “break-even point,” where home equity increases enough to explore the option of refinance. Reaching the break-even point on your mortgage indicates you may have enough home equity to recoup the added costs of a mortgage refinance and walk away with a lower monthly payment. (You can calculate your mortgage refinance break-even point here and get your questions answered by a loan officer here.)
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Available home equity is rising. Many homeowners have seen their equity double within the last few years. CoreLogic’s 2018 HPI Forecast shows that home prices could increase again, nearly 5 percent by September 2019.
- Using home equity is becoming more popular. Refinancing to cash in home equity is hot again, beating home equity loans and lines of credit. Freddie Mac numbers show that over 80 percent of homeowners used cash-out refis to tap into $14.6 billion in equity in the third quarter of 2018. This could be an indicator that homeowners are feeling more confident.
- Cashing in on home equity is versatile. You could use your available funds to pay for home improvements (potentially increasing your home’s value even further), pay for medical expenses, pay for college education, pay off credit cards or student loan debt, buy a big-ticket item, support retirement, and much more. (Note that the Consumer Financial Protection Bureau cautions homeowners to weigh an investment strategy carefully before using available home equity for investments.)
Stay home and stay happy. If you’re ready to move toward your next big milestone — without making a move — a Cornerstone loan officer can help. Get in touch, get your questions answered, and get home equity funds for your future.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.
While refinancing could make a significant difference in the amount you pay each month, there are other costs you should consider. Plus, your finance charges may be higher over the life of the loan.
Cornerstone Home Lending and its affiliates do not provide financial planning, tax, legal or accounting advice. This material is for informational purposes only. It is not intended to provide, and should not be relied on for, financial planning, tax, legal or accounting advice. You should consult your own financial planning, tax, legal and accounting advisors before engaging in any transaction.