How to Get Equity Out of a Home
You can get equity out of your home by taking out a home equity loan, opening a home equity credit line, or getting a cash-out refinancing loan.
Written by Patrick Price
Reviewed by Melanie Reiff
If you own part of your home’s value, you may be able to borrow up to 85% of that equity by taking out a home equity loan, a home equity credit line, or a cash-out refinancing loan. Getting equity out of a building can be a quick way to get badly-needed funds if money is tight, but there are serious risks involved.
Home equity—which is the amount of your home that you actually own—can be leveraged for quick cash. According to a recent
study by CoreLogic
, home equity in the U.S has increased by an unprecedented 32.2% in the first quarter of 2022, which puts homeowners in a strong position to withdraw money based on their accrued home equity. This could help you out of a financial bind, but you’ll need to know how you canget equity out of your house and what the risks are.
To fill you in on all the important details,
Jerry
—the licensed broker
and super app for saving money on home insurance
—has arranged this comprehensive guide on how to get equity out of your home. What is home equity?
In the simplest terms, home equity is the amount of your home’s value that you own outright. You can also think of it as how much of your mortgage principal you’ve already paid off.
In technical terms, your home equity is the current fair market value of your home minus your remaining mortgage balance (subtracting any liens there are against your house).
How to calculate how much equity you have
You can calculate your home equity yourself in just a few minutes—it’s fairly simple. Here are the important things to know when calculating how much equity you have:
- Use your home’s most recent appraised value. The local government should appraise your home at least once every 1-10 years, depending on where you live. If you feel that the most recent appraisal is no longer accurate, you can hire an appraiser.
- Check your mortgage account to see how much you still owe on the loan.
- Subtract what you still owe on the mortgage from the current market value of your home—the answer is your total equity.
Let’s say you owe $100,000 on your mortgage and your home's current value is $300,000. Your home equity would be $200,000.
So that means you can borrow $200,000 against your house, right? Not exactly.
Lenders won’t usually loan you the full amount of your equity. Every lender has their own rules regarding how much they’ll lend you—but typically they’ll cap it at around 80-85% of your available equity.
The actual real-dollar value of your equity isn’t the only factor that determines if you’ll be able to borrow against it. It’s possible to have $500,000 or more in home equity and still not qualify for a home equity loan or credit line.
It all depends on the
loan-to-value (LTV)ratio
, or the amount you owe divided by the value of your home. No matter how much actual capital you have in the house, if your LTV ratio is greater than 80% (meaning you still owe 80% of your home’s value), no lender is going to let you borrow against it. Calculating loan-to-value ratio
Luckily, your LTV ratio is another figure that’s easy to calculate.
The lower the LTV ratio, the more of the home belongs to you—a 20% LTV ratio, for instance, would mean that you own 80% of the house’s value.
To calculate your LTV ratio, divide the remaining balance on your mortgage loan by the current appraised value of the house.
You’ll get a decimal point answer below (hopefully it will be below 0). Multiply that number by 100, and you’ll have the percentage of the house that you do not own. So the equation looks like this:
( [remaining amount owed on mortgage] / [home’s value] ) * 100
Let’s say that you owe $100,000 on your mortgage and your home is worth $300,000. You would divide 100,000 by 300,000, which would give your 0.33.
Multiply that by 100 and you get an LTV ratio of 33.3%. This would mean that you have 66.7% equity in your home.
NOTE: If you calculate your equity value and you get a negative number, or you calculate your LTV ratio and you get a number greater than 1, that means you owe more on your house than it is worth, which is referred to as being “
upside down
” on your loan. This is a serious financial predicament, and you should take immediate steps to increase your home equity—we’ll discuss how to do that later on.
How to take equity out of your house
So, we’ve established that you can get equity out of a home, although it’s not always advisable. But if you decide you need to, how do you do it?
There are three main ways that you can turn your home equity into usable capital. You can apply for a home equity loan, open a home equity line of credit, or take out a cash-out refinancing loan.
Home equity loan
A home equity loan (sometimes called a
second mortgage
) is a mortgage loan that you take out in addition to your primary mortgage. Unlike a standard mortgage, home equity isn’t taken out to finance the purchase of a home. Instead, it's a personal mortgage loan that you take out using your accumulated equity as collateral. The nice thing about home equity loans is that they have fixed interest rates. On the downside, rates for second mortgages are generally higher than your primary mortgage loan.
Home equity line of credit
A home equity line of credit (HELOC) is similar to a home equity loan, except that it has a revolving balance—which means it doesn’t have a fixed number of payments and is automatically renewed as it is paid off.
Basically, it’s a living loan without a set borrowing amount. The balance and interest rate grow as you spend it. And, once you’ve paid the balance down, you can reuse the credit as many times as you like, just like a credit card.
Unlike a credit card, though, a HELOC will usually enter a repayment period after a predetermined amount of time—typically about 10 years or so.
Cash-out refinance
Like the first two approaches to getting out equity, cash-out refinancing is a form of mortgage loan. Specifically, it's a mortgage refinancing loan where you deliberately borrow more than the amount you still owe on your mortgage.
You then pay off your original mortgage and keep the difference.
Key Takeaway There are three different methods of getting equity out of your home: home equity loans, home equity lines of credit, and cash-out refinancings. All three are forms of mortgage loans that use your home as collateral.
Pros and cons of taking equity out of your house
Like any major financial decision, taking equity out of a building (in this case, your house) has certain advantages and drawbacks.
This may or may not be the right choice for you, depending on your situation. Either way, it’s important that you understand the pros and cons before moving forward.
Pros
A home is a valuable piece of property, and it holds a lot of accessible income. Getting equity out allows you to utilize that money—which can be a huge help in difficult times. There are quite a few other benefits as well. Here are just a few:
- Borrowing against your home’s equity usually involves far lower interest rates than other methods of borrowing money (such as personal loans or credit cards)—typically 10% to 13% lower.
- Home equity loans, credit, and refinancing options are often more flexible than other loans/credit accounts. You’ll usually have a variety of choices regarding loan terms and payment options.
- Many types of loans are restrictive about how you can use the money. This isn’t usually the case with home equity, though. For the most part, you can use the money for whatever you like—as long as you make your payments on time.
- You can usually deduct the interest you pay on home equity loans/credit lines when tax season rolls around.
Cons
On the other hand, taking out any kind of equity loan is a risky move. Remember that you’ll be putting your home up as collateral. If you’re unable to make the payments, you could face foreclosure.
The cons of foreclosure include:
- You could lose your home and all the equity you have accrued in it.
- Your credit score will take a massive blow. It’s not uncommon for scores to drop 100 points or more.
- The black mark on your credit report will last seven years and make it nearly impossible for you to borrow money for anything.
- The lender who granted you the equity loan could take you to court to squeeze you for even more money. They could end up with the right to garnish your wages and/or seize any property that you still own.
Another danger in taking out equity in your house is that the market could shift and property values could fall.
It’s entirely possible that you could take out an equity loan, and then the value of your home could fall below the amount you had borrowed. Just like that, you’d become upside down on your house without ever missing a payment.
How to increase your home equity
If your home equity isn’t quite where you’d like it to be, there are a few ways that you can give it a boost. Paying off more of your mortgage balance, increasing your home’s property value, and refinancing your mortgage are all effective methods of increasing equity.
Pay down your mortgage balance
The simplest and the most obvious way to increase your home equity is to make additional payments toward your remaining mortgage balance.
After all, your equity is the value of your home minus the balance on your mortgage—if the balance on your mortgage decreases, your equity increases.
Of course, if you’re looking to get equity out of a building because you need money, this isn’t going to be the most feasible option. If money is tight, the last thing you want to be doing is making additional mortgage payments besides those that are required.
Increase the property value of your home
If the property value of your home goes up, it does not affect your mortgage balance at all—meaning the difference between them (your equity) will increase.
The property value of your house will rise and fall naturally along with market fluctuations. But waiting around for the housing market to rise isn’t exactly a proactive solution.
Fortunately, there are things that you can do to drive that value up yourself. Remodeling, renovating, repairing, and generally sprucing up your home are all good ways to increase its value—maybe it’s time to finally get that upstairs bathroom redone!
Refinance your mortgage
The third and final option for improving your home’s equity would be to refinance your mortgage to a shorter term.
This will mean that you pay off your mortgage more rapidly, but your monthly payments will be higher—you should only consider this option if you have room in your budget to cover the increased payments.
Taking out home equity and home insurance
You might be asking yourself: is taking out equity on my home going to affect my homeowners insurance?
The answer is yes—at least, in a certain sense. Taking out equity won’t affect your homeowners insurance directly, but it will have a significant impact on your PMI.
Fortunately, there are ways that you can reduce your homeowners insurance costs to alleviate any financial strain.
How does taking out equity affect your home insurance?
To clarify, homeowners insurance—which protects you and your house—is rated based on the current market value of the home.
While the percentage you own of the house will change when you take our equity, the house’s actual value will not, so your homeowners insurance payments shouldn’t be affected.
However, if you have private mortgage insurance (PMI) on your home, it will be affected. PMIs are a type of mortgage insurance that many lenders require—mortgage insurance being a financial safeguard to mitigate that lender’s losses if you default on the loan.
Typically, you’ll only have to pay for a PMI for a few years. Once you reach a certain equity in the home, you can
have your PMI removed
. If you take equity out, you’ll have to pay the PMI longer. You could even be required to add a new PMI policy or reinstate one that you were able to remove before.
This can be a serious additional expense and should be taken into consideration before rushing into an equity loan.
How to find affordable homeowners insurance
It’s not all bad news on the insurance front, though. In fact, many homeowners are able to pay for their additional PMI expenses after taking out an equity loan by saving money on theirhomeowners insurance policy.
Jerry compares rates across dozens of top name-brand insurance companies to find the best deals for you. Just select the one you like best, and Jerry will do all the hard work to get you switched over.
“
Jerry
was wonderful! I used it for my auto and renters policies. I trusted it so much that I signed up my homeowners insurance under Jerry as well. All of the agents are amazingly nice and knowledgeable.” —Mary Y.How does taking equity out of your house affect your credit?
As far as your credit score is concerned, taking out home equity isn’t much different from taking out any other loan—it’s a large amount of new debt entered onto your record. You can expect your credit score to drop considerably after taking out equity.
What can I use my equity loan for?
Equity loans are daily flexible. Each lender has its own loan terms, of course—but for the most part, you can use your equity loan for just about anything. The important thing is to not fall behind on your payments.
How much equity can I take out of my Home?
You can usually take out a maximum of between 80% and 85% of your total equity—which is the accessed value of your home minus the amount that you still owe on your mortgage.
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