5 ways to tap into home equity

Home equity levels have increased rapidly over the last couple of years, thanks to a swift uptick in home values, coupled with low inventory levels and high buyer demand. As of the first quarter of this year, about 47% of mortgaged residential properties nationwide were considered equity-rich, which means that the homeowners have at least 50% equity in their homes, according to ATTOM's 2023 U.S. Home Equity & Underwater Report.

Your home's equity can be a useful financial tool. If you have equity in your home, you can tap into it when you need funds to cover home improvements, debt consolidation, education expenses, medical bills or some other large expense. But what exactly are the options for tapping into your home equity? We'll take a deep dive into the home equity tapping methods below to help you make the most of your homeownership.

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5 ways to tap into home equity

Here are five ways homeowners can start utilizing their home equity today.

Home equity loans

A home equity loan, also known as a second mortgage, allows you to borrow against the equity you have built up in your home. With this equity-tapping option, you borrow against your equity and receive a lump sum of money. Because this option offers access to one amount, it usually makes sense to consider when you have a specific financial need that requires a large upfront payment, such as a home renovation project or debt consolidation.

The money you borrow with a home equity loan is repaid in fixed monthly installments over a predetermined term — typically between five and 30 years. Interest rates for home equity loans are typically fixed, and the rates tend to be lower than the rates offered on other forms of borrowing, like personal loans or credit cards. It's worth noting, though, that home equity loans also come with closing costs, which can increase the total cost of borrowing.

Home equity line of credit (HELOC)

A HELOC is another way to tap into your home's equity. This option is a second mortgage, but it provides you with a line of credit that you can borrow from as many times as necessary during the draw period. HELOCs offer a unique type of flexibility since you can borrow and repay multiple times during the draw period. This makes them an ideal option for ongoing expenses or projects where the costs may vary over time, such as funding education or covering unexpected medical bills.

Similar to a credit card, you have a borrowing limit with a HELOC, which is a certain percentage of the equity you have in your home. This percentage limit varies among lenders, but is typically capped at between 80% to 90% of your home equity. With a HELOC, you also only pay interest on the amount you utilize during your draw period, but the interest rate is typically variable instead of fixed, so what you pay for interest could fluctuate depending on changes to the market.

Cash-out refinancing

Cash-out refinancing is another option you have for tapping into your equity, but it isn't a second mortgage like a HELOC or home equity loan. With cash-out refinancing, you're replacing your existing mortgage with a new one that has a higher loan amount based on what you're borrowing from your equity, allowing you to access the difference in cash. 

This option can be worth considering if you want to take advantage of lower mortgage rates. You can also use a cash-out refinance to access your equity while extending your loan term or converting an adjustable-rate mortgage into a fixed-rate one while also accessing your home's equity. It's worth noting, though, that if your current rate is lower than the rates being offered currently, it may not make sense to take this route. It's also important to carefully consider the fees and closing costs associated with refinancing.

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Reverse mortgage

Reverse mortgages are specifically for homeowners aged 62 or older, but if you're able to meet the age requirement, a reverse mortgage will allow you to convert a portion of your home's equity into loan proceeds. But unlike the other options, you don't need to make monthly payments on the money you borrow. The loan is instead repaid when you sell the house, move out or die.

Reverse mortgages can be an option worth considering for retirees who wish to supplement their retirement income or cover unexpected expenses with the equity they've built in their homes. However, it's crucial for potential borrowers to fully understand the terms, potential risks and eligibility criteria before pursuing this option, as this equity product functions quite differently from other home equity options.

Home equity sharing

A relatively new concept, home equity sharing allows homeowners to sell a portion of their home's equity to investors or companies in exchange for a lump sum payment. In this arrangement, the investor shares in the future appreciation of your home's value. What can be attractive about home equity sharing is that it provides immediate access to funds without taking on additional debt or making monthly payments — and without the added burden of interest. 

These types of home equity products are typically easier to qualify for when compared to HELOCs or home equity loans. In turn, it can be a fix for homeowners who can't access their home's equity through more traditional methods, or for those who need access to liquidity but don't want to incur more debt. However, it's important to carefully evaluate the terms, conditions, and potential long-term implications before entering into an agreement for home equity sharing.

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The bottom line

Tapping into your home's equity can be a viable strategy to meet your financial needs. There are plenty of options to do so between home equity loans, HELOCs, cash-out refinancing, reverse mortgages or home equity sharing. Before you decide to cash in on the equity you've built in your home, it's important to consider your specific circumstances, goals and financial plans. Owners should also compare interest rates, fees and repayment terms to find the option that aligns best with your needs.