Home equity levels have doubled in under a decade. Here are 4 ways to tap into yours.
Over the past several years, homeowners have witnessed a major surge in their home equity. During the first quarter of 2017, home equity levels totaled $15.6 trillion nationwide, and that number had grown to $32.8 trillion as of Q1 2024 — equating to an increase of over 110% in well under a decade.
That remarkable growth can be attributed to a range of factors, like a robust housing market, periods of low interest rates that fueled demand and limited housing supply in many areas. Another driver behind this equity boom has been the steady appreciation of home values across the country. As property values have climbed, homeowners have seen their equity grow substantially. Plus, many homeowners took advantage of historically low interest rates during the pandemic to refinance their mortgages, allowing them to pay down their principal faster and build equity even quicker.
In turn, many homeowners are considering ways to use their home equity, whether it's to consolidate debt, make home improvements or renovations or even build wealth over time. And, that can be a a smart financial move, especially in today's economic climate, where interest rates on home equity products may be lower than other forms of borrowing. Before tapping into your home's equity, though, it's important to understand the various options available and determine which one makes sense for you.
Find out what today's top home equity borrowing rates are here.
4 ways to tap into your home equity
There are a few ways to access your home's equity.
A home equity line of credit
A home equity line of credit (HELOC) functions similarly to a credit card, with a revolving line of credit that lets you tap into your home's equity. During the HELOC's draw period, you can borrow as needed up to a predetermined limit. You then enter a repayment period where you pay back the borrowed amount, plus interest.
HELOCs offer flexibility to borrow only what you need, when you need it, and often come with lower interest rates compared to credit cards or personal loans. For example, right now, the average HELOC rate is 9.18% (as of July 18, 2024). That's substantially lower than the average rate on a credit card, which is hovering above 21% currently. And, the interest on a HELOC may also be tax-deductible if used for home improvements.
However, HELOCs also typically come with variable interest rates, which can increase over time, potentially leading to higher payments on the money you borrow. There's also the risk that if you default on payments, you could face foreclosure, as HELOCs are a type of second mortgage secured by your home.
Get started and explore your home equity loan options online now.
A home equity loan
A home equity loan allows you to tap into your home's equity with a lump sum loan that you repay over a fixed term. This type of home equity borrowing option comes with a fixed interest rate, meaning you'll have predictable monthly payments, making budgeting easier.
The lump sum nature of this borrowing option is ideal for large, one-time expenses, and the interest rates on home equity loans are often lower than unsecured loans. Right now, the average home equity loan rate is also lower than the average HELOC rate at 8.60%, making it one of the most affordable borrowing options to consider in today's high-rate environment.
The downside is that these loans are less flexible than HELOCs, and closing costs and fees can be substantial depending on the amount you borrow. You'll be adding a second payment to your monthly mortgage obligation, which could strain your budget if you aren't careful — and as with a HELOC, you're using your home as collateral.
A cash-out refinance
When you tap into your home equity with a cash-out refinance, you're replacing your existing mortgage with a new, larger loan and pocketing the difference in cash. As with home equity loans and HELOCs, the interest on a cash-out refi may be tax-deductible if used for home improvements. And, in a normal rate environment, a cash-out refinance can potentially secure a lower interest rate on your entire mortgage, simplifying your finances with a single monthly payment instead of two separate ones.
But that's generally not the case in today's rate environment, as today's mortgage rates are substantially higher than they were a few years ago. So, if you secured your mortgage loan when rates were closer to 3%, a cash-out refinance may not make much sense, as it will add significantly to the cost of your mortgage loan.
A reverse mortgage
Available to homeowners aged 62 and older, a reverse mortgage allows you to borrow against your home's equity without making extra payments on a new loan each month. Rather, the money you borrow is paid back when you move out and sell the home or after you die.
The main benefit of a reverse mortgage is that it can provide steady income during retirement without requiring monthly mortgage payments. And, it also offers flexibility in terms of how you receive the funds, which could be via a lump sum, a line of credit or monthly payments.
However, there are some potential downsides to consider, too. For example, you're required to live in the home to meet the requirements of the loan. Fees and interest rates can also be high, and the product is complex, making it unsuitable for some types of homeowners.
The bottom line
With home equity levels doubling over the past seven years, there have been significant equity-tapping opportunities created for homeowners. Before you tap into your home equity, though, it's important to fully understand what option may be right for you, which starts by considering your financial goals, your unique situation and your money plans — both short- and long-term. By weighing these factors and fully understanding how to access your home equity, you can make a decision that helps you achieve your financial goals while protecting your most valuable asset.
