There are many benefits of home ownership. More space, more privacy, and more freedom rank high on the list. These three factors act as the driving force behind the recent uptick in home ownership.
But there’s another major benefit to owning a home. It takes years to develop, but once it materializes, it becomes one of the greatest assets at your disposal. We’re talking, of course, about the equity in your home.
What is home equity? Simply put, it’s the difference between your home’s current value and the remaining balance on your mortgage. For instance, if your home is worth $450,000 and you have $100,000 left to pay on the mortgage, the home equity would be $350,000. There’s a little more to it than that, but that’s the general definition.
If you’re a homeowner, this could mean you’re sitting on a small fortune. What’s more, there are several ways in which you can tap into that capital, most of which don’t involve selling your house.
With this in mind, let’s take a look at six ways to leverage the equity in your home:
Home equity loan
The simplest way to tap into your home’s equity is to borrow money against it. This is known as a home equity loan. You can usually get approved for one through your personal bank. However, there are other financial service providers who specialize in assisting homeowners in securing home equity loans with the best terms and lowest interest rates.
Home equity line of credit
Home equity lines of credit – commonly referred to as HELOC – are similar to home equity loans. As the name suggests, the difference is you gain access to a line of credit instead of a loan. So rather than receive a single loan in one lump sum, you have the option to make multiple withdraws from an account with a set amount of money in it. The biggest benefit of HELOCs is the custom approach to utilizing the funds; rather than managing a massive amount of money, you can take what you need when you need it and save the rest for later.
Reverse mortgage
A reverse mortgage is basically what it sounds like; you trade the equity in your home for a monthly payment. The money can be used for whatever you want, but unless the loan is repaid, the lending agency takes ownership of the property if the current owner moves or passes away. There are many misconceptions about reverse mortgage loans, so make sure to read about important reverse mortgage facts before going forward with this option. For instance, most people don’t know there’s an age restriction for those who qualify. Only those 62 or older are eligible for a reverse mortgage.
Cash-out refinance
A cash-out refinance refers to getting a new home loan that’s more than what you currently owe. You receive the difference as a one-time lump sum cash payment. In other words, you are cashing out your home’s equity, starting your mortgage over in the process. It’s an enticing option for folks who plan on staying in their homes for the foreseeable future, as it allows them to take advantage of lower interest rates while providing them with the funds needed to cover home improvement projects and other expenses.
No cash-out refinance
As the name suggests, a no cash-out refinance option involves homeowners replacing their existing loan with one of equal principal value or less value. Rather than receiving the difference in the form of cash, homeowners use it to negotiate a lower interest rate or make other adjustments to the terms of the loan. These changes lead to significant cost savings over time.
Sell
Of course, you can always go the route of selling your home and pocketing the difference between what you owe and what the buyer pays. But if selling is what you want to do, you’d better act fast; home values soared during the pandemic but are now regressing toward the mean. That means your home may be worth less next year than it is right now. With that said, those selling their homes often plan on buying another one, so the value adjustment will likely even out regardless of when you choose to sell.
Homeownership is all the rage these days. And after several years of making your mortgage payment, you end up with significant value in your home buckets, known as equity. What you choose to do with that equity depends on the specifics of your situation. But with so many options available, it’s safe to say you’ll have no problem finding the perfect choice.
Julie Steinbeck is a freelance writer from Florida. She enjoys covering topics related to business, finance, and travel.
