There are different ways to leverage the equity in your home.
- Home prices soared in 2021 as low mortgage rates fueled buyer demand.
- American owners are now sitting on $9.9 trillion in equity that they can use to their advantage.
It’s no secret that home prices have skyrocketed over the past year. Just ask any homebuyer who has tried to make an offer on a property to be shocked at how many other offers.
But while high home values are a bad thing for buyers, they are a good thing for sellers and owners. Currently, the latter group is sitting on an all-time high of equity.
A dazzling increase in equity
Home equity refers to the part of your home that you fully own. You can calculate the amount of equity in your home by taking its market value – that is, the price it can sell for – and subtracting your mortgage balance. If you own a home worth $500,000 and owe $200,000 on your mortgage, that leaves you with $300,000 of equity that you can leverage.
At the end of 2021, home equity rose to $9.9 trillion nationally, according to data firm Black Knight. This is a 35% increase over the previous year. It also leaves the average homeowner with $185,000 of workable equity.
What to do with the equity in your home
Having a lot of home equity gives you a number of options, not least because you can borrow against that equity or even withdraw some of it.
Let’s say you have some home renovations you were hoping to do. If you’re borrowing against your home’s equity, those renovations could become a reality. You can also use the equity in your home to pay off unhealthy debt, like a credit card balance. And while it’s a good idea to use the equity in your home to achieve important financial goals, you can technically leverage that equity for any purpose, which means you can borrow against your home to take a vacation if you wish (even if it is not recommended) .
How to access the equity in your home
There are a few options you can use to leverage the equity in your home. First, you can borrow against your home through a home equity loan or a line of credit (HELOC). Neither option requires you to take out a new mortgage. Instead, you take out a separate loan or line of credit and continue to pay off your existing home loan.
With a home equity loan, you borrow a lump sum of money that you pay back in equal installments. The interest rate on this loan will be fixed, which is a good thing right now. Interest rates have risen and may continue to rise this year.
With a HELOC, you have access to a line of credit that you can draw on within a set time frame, usually five to ten years. You will only accrue interest on the portion of your HELOC that you operate, so if you get a $10,000 HELOC but borrow $8,000, the remaining $2,000 will not create a financial liability for you. However, HELOC interest is generally variable, so you run the risk of your interest rate increasing over time.
Finally, you can tap into the equity in your home with a cash refinance. This requires you to get a brand new mortgage – one where you borrow more than your remaining balance and get the rest in cash.
While today’s refinance rates are still competitive, they have steadily increased. If you’re going to lock yourself into a long-term loan, it might be worth moving before rates continue to rise.
The equity in your home gives you more options. It also puts you in a position where you can make a good profit from the sale of your home. In fact, last year the average seller walked away with a profit of around $94,000, so if you’ve been thinking about putting your home up for sale, now might be the time to do so.
A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage
Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.
Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.