You know how much money you have in your bank account, but do you know much you have in your house? (And we don’t mean the coins stuck in the couch cushions!)
Home equity, the difference between what your house is worth and how much you still owe on it, reached a staggering $17.2 trillion nationwide in Q3 2024. And of that, $11.2 trillion is “tappable,” meaning it can be borrowed against without selling the home. On an individual level, the average mortgage-holder has $319,000 in equity, $207,000 of which can be tapped while leaving 20% equity in the home.[1]
How to Turn on the Tap
To access your equity, you have a few options:
Home equity loan. Also called a second mortgage, this option provides a lump sum of cash at a fixed interest rate and repayment schedule (typically five, 10, or 15 years). With a home equity loan, you make separate monthly payments in addition to your mortgage payment.
Home Equity Line of Credit (HELOC). This is structured more like a credit card. You are approved for a certain amount, and you can borrow that money as you need it. You only pay interest on what you borrow. Unlike a credit card, this credit line is only available for a set number of years, and then you enter the repayment period.
Cash-out refinance. With this approach, you refinance your current mortgage for a higher loan amount, and you receive the difference in one lump sum. Most lenders will let you cash out up to 80% of your home equity.
There are advantages and disadvantages to each loan type. Talk to your Loan Officer to see what best fits your needs.
Your Money, Your Rules
Wondering what you can use that money for? The good news is that it’s up to you, but since a home equity loan is secured by your home, it’s important to use those dollars wisely. Here are some common ways to use home equity:
Home improvement. If your home isn’t meeting your needs, or if it just needs some TLC, your home equity can fund repairs or renovations. In fact, if you choose the right project, this may add value to your home … possibly even enough to cover the loan amount. (See “Renovation ROI.”)
Paying off high-interest debt. Interest rates on home equity loans are typically higher than those on first mortgages, but they may be significantly lower than what you’re paying on credit cards or other loans.
Large expenses. If you have big-ticket items to pay for such as medical expenses or college tuition, your home equity may be a lower-interest way to meet your financial needs.
Investment property. If your financial health and cash flow are good, this may be a way to create passive income through long-term (residential) or short-term (Airbnb, Vrbo) rentals.
However you proceed, remember that with any type of second mortgage, you are using your home as collateral. If you don’t keep up with payments, you could lose your home. So, talk to your Loan Officer to understand your options and responsibilities. Then see what your home equity can do for you!
Renovation ROI
Home equity is a great way to finance home improvement projects, but before you grab a sledgehammer, you may want to consider how much of the project’s cost you can expect to get back when you sell your home. Here are a few examples of ROI:[2]
Sources:
ICE Mortgage Technology, November 2024 Mortgage Monitor.
National Association of REALTORS® (NAR), 2022 Remodeling Impact Report.