4 Min Read | Published: April 16, 2024
What Is Home Equity and How Can I Use It?
You can use home equity in a number of different ways, but you’ll want to carefully consider the pros and cons of tapping into your home’s equity first.
At-A-Glance
Home equity is the current value of your home minus your mortgage balance.
You can use home equity in a number of different ways. You may opt to pay off debt or cover home renovations, repairs, and upgrades.
You’ll want to carefully consider the pros and cons of tapping into home equity before opting for a Home Equity Loan or Home Equity Line of Credit (HELOC).
Homeownership comes with many benefits, including access to home equity. Depending on your situation, you may be able to use your home equity to make informed financial decisions. Below we’ll explore what home equity is, what you can do with it, and factors you’ll want to keep in mind before you access it.
What Is Home Equity?
Put simply, home equity is the difference between what you owe on your mortgage and the current market value of your home. It describes the amount of your home that you own outright. When you first take out a mortgage, you may not have a lot of equity. However, over time, your equity might increase because of factors such as:1
- Appreciation: Appreciation refers to the increase in a property’s value over time. As a home appreciates, so does home equity. (Note that appreciation will vary depending on factors including the housing market)
- Mortgage Payments: When you make your mortgage payments, part of them reduce your principal, which is the original sum of money you borrowed to pay for your home. This will build your home equity.
- Home Renovations and Upgrades: Certain home renovations and upgrades can sometimes improve your home equity by increasing the value of your home. A few examples of improvements that you can make include kitchen remodels, energy-efficient appliances, and deck or patio additions. (Note that not all improvements will improve your home’s value, though)
How to Use Home Equity
If you have a certain amount of home equity in your home, you may be able to borrow against it through a home equity line of credit (HELOC), home equity loan, or a cash-out refinance. While a home equity loan provides a lump sum of money upfront, a HELOC acts as a revolving line of credit and allows you to withdraw funds whenever you want, up to a certain limit, similar to a credit card. Meanwhile, a cash-out refinance involves taking out a new mortgage to replace your current one.
Here are several of the most popular ways to use home equity:2
- Pay Off Debt: If you’re struggling with debt, home equity can help you repay your balances faster and potentially save some money on interest.
- Home Renovations and Repairs: There’s no denying that the cost of home renovations and repairs can add up quickly. Fortunately, you may use home equity to cover them.
- Upgrades: Home upgrades, like new windows or solar panels, are often expensive. Your home equity can make them more affordable.
- Investments: With home equity, you may opt to fund an investment, such as a rental property, mutual funds, or stocks.
If you do decide to leverage your home equity, make sure it makes financial sense to do so. You’ll want to carefully consider the risks of doing so as well. If you fail to repay your loan, your lender could foreclose on the home.
Did you know? Lenders who offer home equity loans and HELOCs typically allow you to borrow 80% to 85% of your home’s equity.3
Important Considerations Before Using Home Equity
Before tapping into your home’s equity, you’ll want to carefully consider the risks of doing so. The cash that you end up gaining from the home equity isn’t free. And there may be better options available in some cases. Here are a few risks you’ll want to keep in mind:
- The risk of losing your home
If you can't keep up with your payments, you could risk losing your home. Make sure you will be able to repay the loan before you take it out, and only borrow what you need. - Rising interest rates
Rising interest rates could result in an expensive loan. - Fees for borrowing
You’ll also face fees for borrowing. Typically, cash-out refinance mortgages, home equity loans and HELOCs are subject to origination fees.
Carefully consider these factors, along with your reasons for obtaining the loan when deciding whether borrowing against your home’s equity is a good idea.
Frequently Asked Questions
Using home equity may be a good idea if you’re confident you can repay your home equity loan or HELOC. Otherwise, you may end up putting your home at risk for foreclosure.
There are many lenders that offer HELOCs and home equity loans. These include banks, credit unions, and online lenders.
If you make your payments on time, a HELOC or home equity loan may positively impact your credit score. Late payments, on the other hand, may damage it.
The Takeaway
Home equity is the amount of your home that you own. It’s the difference between your mortgage and home’s current value. While you can use home equity to pay off debt and fund renovations, repairs, upgrades, and investments, you should weigh the pros and cons and consider available alternative options before you do so.
1 “Home Equity Loans and Lines of Credit,” MyCreditUnion.gov
2 “What is a Home Equity Loan?,” HelpWithMyBank.gov
3 “What Is the Most You Can Borrow With a Home Equity Loan?,” Investopedia
Anna Baluch is a personal finance writer from Cleveland, OH. She enjoys helping people from all walks of life make smart financial decisions. Her work can be seen on Credit Karma, Forbes, LendingTree, Insurify, and many other publications. Connect with Anna on LinkedIn.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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