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Tapping into your home’s equity can be a good way to access cash quickly to pay for renovations or improve your financial picture, but it’s important to proceed with caution when borrowing against the roof over your head.
Common options for accessing your home’s equity include a cash-out refinance, a home equity loan or a home equity line of credit (HELOC), each of which can be used to cover everything from home improvements to debt consolidation, college costs and even emergency expenses.
What is home equity?
Home equity is the portion of your home that you’ve paid off. It’s the difference between what the home is worth and how much is still owed on your mortgage. For many, equity from homeownership is a key way to build personal wealth over time. As your home’s value increases over the long term and you pay down the principal on the mortgage, payday loans MO your equity grows.
“Equity provides many opportunities to homeowners, as it’s a great source for savings and for financing,” says Glenn Brunker, president at Ally Home. “For example, the equity amassed in a starter home may later provide the down payment needed to purchase a larger home as a family grows and needs more space. It’s a time-tested way to build wealth.”
Home equity is typically used for big expenses and often represents a more cost-effective financing option than credit cards or personal loans with high interest rates.
How home equity works
The most common ways to access the equity in your home are a HELOC, a home equity loan and a cash-out refinance.
To tap into your home’s equity through one of these options, you’ll need to go through a process that’s very similar to obtaining a mortgage.
“Lenders will consider multiple factors, including a person’s debt-to-income ratio, loan-to-value ratio, credit score, and annual income,” says Michele Hammond, senior home lending advisor at Chase Private Client Home Lending. “Additionally, to determine the amount of equity in a home, a lender will employ an appraiser to determine the current market value of the home, which is based on its conditions and comparable properties in the area.”
Why use home equity?
Tapping your home equity can be a convenient, low-cost way to borrow large sums at favorable interest rates to pay for home repairs or debt consolidation.