Homeowners have $30 trillion in home equity. Here's how to tap into it.

While the housing market is an unfriendly place for buyers right now, many current homeowners are sitting pretty. Home values have increased drastically over the last couple of years, and homeowners now collectively have nearly $30 trillion in home equity, according to the latest data from the St. Louis Federal Reserve. What that means is that the average homeowner is sitting on about $200,000 in tappable equity.

If you're one of those homeowners, you may be wondering whether you have the option to borrow against your home's equity to fund a large purchase, pay off high-interest debt, make repairs or renovations to your home or pay for some other major expense. And, the good news is that you can — and there are numerous routes you can take to do so.

Explore your home equity loan options here to learn how.

Homeowners have $30 trillion in home equity. Here's how to tap into it.

If you want to borrow from the equity in your home, here are your options: 

Home equity loan

Home equity loans are a straightforward way to access your home equity. These types of loans involve borrowing a lump sum of money secured by your home's equity. Lenders typically limit the amount you can borrow to 80% to 85%, and the loan typically has a fixed interest rate and a predetermined repayment schedule.

Pros

• Fixed interest rates: Home equity loans provide predictability with fixed interest rates, ensuring stable monthly payments.
• Lump sum: You receive a one-time lump sum, ideal for specific financial needs like home renovations or debt consolidation.
• Potential tax deductions: In some cases, the interest paid on home equity loans may be tax-deductible, offering potential cost savings.

Cons

• Interest costs: Because you're borrowing a lump sum, the interest accrues on the entire loan amount, regardless of how much you use.
• Risk of foreclosure: Your home serves as collateral, so failure to make payments can lead to foreclosure.
• Closing costs: Home equity loans come with upfront expenses, such as appraisal fees and loan origination fees, which can increase the cost of borrowing.

Learn more about the home equity loan rates you could qualify for here.

Home equity line of credit 

A home equity line of credit (HELOC) works similarly to a credit card but is secured by your home's equity. It provides a revolving line of credit with a predetermined credit limit. You can borrow funds as needed during the draw period and repay them over time.

Pros

• Flexible access: HELOCs offer flexibility, allowing you to borrow funds when required, up to your credit limit. You only pay interest on what you borrow, which can make a HELOC cheaper than a home equity loan.
• Lower initial costs: HELOCs may have lower upfront expenses compared to home equity loans.
• Variable interest rates: While potentially risky, variable rates can be advantageous if interest rates decrease.

Cons

• Variable interest rates: While the variable rate can be useful if rates drop, it's important to remember that interest rates can also rise, increasing monthly payments.
• Over-borrowing risk: The flexibility of a HELOC can tempt some borrowers to overspend, potentially leading to financial stress.
• Repayment period: After the draw period, you must repay the principal and interest, which can lead to higher monthly payments.

Cash-out refinance

A cash-out refinance involves replacing your existing mortgage with a new one that is higher than your current mortgage balance. The difference between the new and old mortgage balances is paid out to you in cash and you make payments on the new, higher mortgage loan balance.

Pros

• Potential for a lower rate: If current mortgage rates are lower than your existing rate, you can secure a lower overall interest rate. 
• Tax deductions: Interest on the new mortgage may be tax-deductible, providing potential savings.
• Debt consolidation: You can consolidate high-interest debts into the new mortgage, potentially lowering overall interest costs.

Cons

• Potential for a higher rate: If your rate is lower than the current rates, you'll be paying a lot more on your monthly note by replacing your current loan with a mortgage that has a higher interest rate tied to it. And, with rates as high as they are right now, you may be better off with a HELOC or home equity loan if your current rate is lower than 7.5%. 
• Closing costs: Refinancing comes with substantial closing costs.
• Extended mortgage term: Extending the mortgage term can result in paying interest for a longer duration.
• Risk of foreclosure: Like home equity loans, a cash-out refinance uses your home as collateral, posing a risk if you cannot make payments.

The bottom line

Americans are sitting on a lot of home equity right now, and it can make sense to tap into it under the right circumstances. But while unlocking your home equity can be a strategic financial move, it's crucial to carefully evaluate the pros and cons of each option before making a decision. Your choice should align with your financial goals, risk tolerance and current financial situation. And, remember to always approach decisions involving your home equity with caution, as your home is one of your most significant assets.