How to use home equity while prices are still high

After years of home prices increasing, signals have been mixed through 2023. 

While prices fell earlier this year, especially in certain regions, they now seem to be moving back upward. As of June, home prices are only slightly less (under 1%) than they were a year ago, according to Redfin. Meanwhile, recent data from Black Knight reveals home prices rising for five consecutive months, and in more than half of the major markets they've even returned to peak value.

For current homeowners, all this data means you could be sitting on a large amount of home equity. Real estate research firm CoreLogic data shows American homeowners had an average of $270,000 in home equity in late 2022, up $90,000 from pre-pandemic values.

With that type of significant equity in your home, tapping into it could be a good option for accessing cash you may need — whether to help cover costly expenses, fund a home improvement project or consolidate debt. In fact, available options for borrowing from home equity, including home equity loans, HELOCs, cash-out refinances and reverse mortgages, often have more favorable interest rates than credit cards and personal loans. 

Start exploring your home equity lending options here now.

How to use home equity while home prices are high

Here are four home equity options to strongly consider using now while prices are still high.

Home equity loan

A home equity loan is an installment loan, generally with fixed interest and repayment terms ranging from five to 30 years. You can borrow a portion (usually 75% to 85%) of your home's equity with this loan for virtually any purpose.

To calculate your home equity, take the difference between the balance you owe on your mortgage loan and your home's current market price. Let's say you purchase your home for $300,000 and pay $100,000 down on your mortgage over time. That puts your mortgage balance at $200,000. At the same time, your home value increases by $100,000 to a total $400,000 fair market value. In this case, your home equity would be $200,000. 

Now, to find your home equity loan potential, you can use that same number. If your lender allows homeowners to borrow up to 80% loan-to-value (LTV), you'll know you may qualify for up to a $160,000 home equity loan (200,000 x 80%). 

However, you should only borrow the amount you need, since you'll pay interest on your entire loan. With good credit, you may qualify for a home equity loan with rates as low as 6% - 8% today. 

Like other home equity borrowing options, you must put up your home as security for the loan, meaning you could lose your home if you default. 

Check out home equity loan options here.

HELOC

A home equity line of credit (HELOC) allows access to your home equity as revolving credit, much like a credit card. One of the key benefits of HELOCs is that you don't have to withdraw and pay interest on the entire credit line. You can borrow only as much as you need, when you need it and only pay interest on the amount you withdraw.

But interest shouldn't be the only thing you consider. "Base your decision about your HELOC term and your HELOC amount based on cash flow, not based on interest rates," says Ben Miller, branch manager at American Mortgage Network. "Where is your budget? Let's talk about your comfort zone. Where do you need to be?"

As with home equity loans, you'll also need to account for any closing costs you'll pay for a HELOC. These can range from 2% to 5% of the amount you borrow, although some lenders do not impose closing fees. Of course, you'll want to shop and compare interest rates among lenders to get the best rate.

Check your HELOC options here to learn more.

Cash-out refinance

A cash-out refinance is a bit different. It involves refinancing your existing mortgage into a larger loan to tap into a portion of your home's equity. You'll end up borrowing a larger loan amount but also have a lump sum of cash in hand. Whereas a home equity loan may be called a second mortgage, a cash-out refinance replaces your original mortgage.

Here's how it works: Let's say you own a home worth $800,000 on the market and have $400,000 remaining on your mortgage balance. Lenders typically allow you to borrow up to 80% loan-to-value, meaning you may qualify to borrow as much as $320,000 (80% of $400,000 home equity). With a cash-out refinance, you would take out a new loan, use it to pay off your current mortgage and keep the resulting cash to use at your disposal.

Keep in mind, this leaves you taking on more debt. And if you're starting a new 30-year loan, you could pay more interest over the life of the loan.

Check your refinance options here to learn more.

Reverse mortgage

Retirees and older Americans might consider a reverse mortgage as a way to use their home's equity to help meet living expenses or other purposes. 

A common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM) and is only available to homeowners who are 62 and older. You must continue to use the home as your principal residence, but you'll no longer have to make monthly mortgage payments. Instead, you or your heirs will repay the loan when you no longer live there. 

Your balance will grow as interest and fees are tacked on to your loan balance each month. Plus, you're still responsible for paying property tax and homeowners insurance. A reverse mortgage may benefit seniors who are "house rich," with abundant home equity but short on cash flow for day-to-day expenses. Be aware, however, that your balance will rise, and your home equity will fall over time. Ultimately, you or your heirs must still repay the loan, which most people do by selling the home.

The bottom line

With home prices significantly higher in many parts of the country today than they were before the pandemic, you may have enough home equity to access the cash you need for an emergency expense, debt consolidation, or renovation project. With home equity loans and HELOCs, you may even qualify for a tax deduction if the funds are "used to buy, build, or substantially improve a qualified home," according to the IRS. 

Before you decide which loan type is right for you, look at your individual finances to determine how a new payment would fit within your budget. And don't forget to shop around and compare lenders to find the best terms you qualify for.