Can't afford a new home? How home equity can improve the one you have

Months of inflation and high home prices have put homeownership out of reach for many potential buyers. It can be harder to qualify for a mortgage than in the past, and even if you do qualify, you may not be able to afford the monthly payments.

If you've realized you need to put your homeownership plans on hold, you can at least make your existing home more enjoyable. And one of the most cost-effective ways is by tapping into your home equity.

Explore your home equity options online now to see if makes sense for you.

How home equity can help you improve your existing home

If you're going to be in your current home for a while, your home equity can help you fund improvements to make that home more functional and comfortable. Here's how.

What is home equity?

Home equity is the difference between the current value of your home and your remaining mortgage balance. In other words, it's how much of the property you own instead of the bank. For example, if your home is worth $300,000 and your remaining mortgage balance is $200,000, you have $100,000 in equity.

As you pay off your mortgage loan, your equity increases. It can also increase if your home appreciates in value — which means the high home prices that pushed you out of the market could give you more equity to use.

Find out how much you can borrow from your home equity here.

How to access your home equity

There are multiple ways to withdraw equity out of your home. The most popular are:

• Home equity loans: A home equity loan essentially acts as a second mortgage on your home. It gives you a lump-sum payment, which you begin repaying immediately, typically at a fixed interest rate. Home equity loans are best suited for those who know how much they need for a home improvement project.
• Home equity lines of credit (HELOCs): A HELOC is a revolving line of credit that lets you borrow as little or as much as you need up to a certain limit. HELOCs typically have variable interest rates that may rise as market conditions change. This option is best for those who want ongoing and flexible access to funds as home improvement costs arise.
• Cash-out refinancing: A cash-out refinance replaces your original mortgage with a new one with a higher balance than your current outstanding balance. The difference between the two balances is given to you in cash. This can be a good option for those who want to extend their loan term or convert an adjustable-rate mortgage into a fixed-rate one.
• Reverse mortgages: Homeowners age 62 or older are eligible for a special home equity product known as a reverse mortgage. These loans essentially provide an advance on your eventual home sale, which you can receive as a lump sum, line of credit or monthly payments. As long as you're living in the home, you do not need to make payments on the loan.

Each of these options has pros and cons, so it's important to consider factors like how much money you'll need for your home improvements, when you'll need these funds and how much you can realistically afford to pay back each month.

Benefits of using home equity for home improvements

Home equity products are secured by the value of your property, and as a result, they typically offer lower interest rates than other financing options. You can use your home equity for anything you want, but using it for home improvements provides some unique benefits.

First, if your home improvements "substantially improve" your home, the IRS allows you to deduct the interest on your tax return. Consult a tax advisor to determine if the improvements you have in mind would qualify for this deduction.

Second, the right home improvements can increase your home's value, giving you additional equity to draw from and potentially netting you a larger profit when you do sell your home.

Compare today's top home equity products here to find the one that's right for you.

The bottom line

If buying a new home isn't feasible for you right now, home equity can help you do the next best thing: making the most of the home you already have. Whether you want to change your home's aesthetics, improve functionality or make repairs, your home equity can be a cost-effective way to make your home more enjoyable until you can affordable a new place.

And who knows? You may find you love your upgrade home so much that you don't want to move after all!