If you have five or six figures worth of cash tied up in your house, then you may find yourself wondering how you can get some of the hard-earned equity out? Thankfully, you have plenty of options.
Calculating the Equity in Your House
The equity in your home is essentially the difference between the appraised value of your home and the amount you still owe on your mortgage. For example, if the appraised value of your home is $500,000 and your remaining mortgage balance is $200,000, that means you have $300,000 in equity.
This figure impacts your “big picture” finances in a variety of ways. It plays a role in both your responsibilities as a homeowner (impacting whether or not you pay private mortgage insurance, for example) as well as your general finances (likely making up a large percentage of your net worth).
4 Ways to Tap Your Equity
Typically, homeowners spend their time trying to increase their equity. There are two ways to do this: (1) Increase the value of the property, and/or (2) Reduce the mortgage balance. But in certain situations, homeowners actually need to tap into the equity that’s already there in order to utilize this money for other purposes.
Thankfully, there are plenty of ways to do this. Here are several of them:
- Quick Sale for Cash
This is the best option if – and this is a big if – you want 100 percent of your equity in a matter of days and are willing to sell your house. In other words, you have $125,000 in equity in your home that you need to start a business. You’re willing to sell your house and rent a place instead, but you can’t wait the three or four months that it may take to fix up your house, list it, negotiate with buyers, and wait for closing.
Selling your house for cash to a local investor allows you to sell your house in as little as 10 to 15 days without repairs, inspections, contingencies, high commissions, and other factors that gum up normal transactions.
- Home Equity Loan
A home equity loan is a loan for a fixed amount of money that’s ultimately secured by your home. The loan is repaid in monthly installments over a fixed period of time (like your original mortgage, only a much shorter period of time).
To qualify for a home equity loan, you’ll have to meet certain requirements for income, credit history, home value, etc. The amount you can borrow is typically capped at 85 percent of the equity you have in the home, though it’s possible that you’ll only be able to borrow 25 to 75 percent (based on your risk profile).
- HELOC
A home equity line of credit, frequently called a HELOC, is an alternative method of taking out equity without actually having to sell your house. It shares some similarities with a home equity loan, but also has very clear differences.
It’s best to think of a HELOC like a credit card with a finite limit that correlates with the amount of equity you have in your home. It’s a revolving line of credit, which means you can take funds out, pay the balance back, and then repeat as many times as you’d like. However, because HELOCs have variable interest rates, you have to be careful not to take out more than you can repay over a short period of time. It should be used to cover small amounts that can be repaid within several weeks or months.
- Cash-Out Refinance
While somewhat risky (and not commonly advised), you can always try a cash-out refinance. This is where you pull the existing equity out of your house and then “begin” your mortgage all over again. This will increase your monthly payments and restart your loan amortization.
A cash-out refinance might give you some money in the short-term, but it’s a pretty costly maneuver over the long-run (particularly if you’ve been in the house a while and have minimal years left on your mortgage). Think long and hard about this option before pursuing it.
Putting it All Together
You never want to tap your equity unless you absolutely have to. Examples include things like home improvements (which will increase the value of your home), debt consolidation, emergency expenses, or safe investments that are likely to produce a substantial return. But in one of these situations, it’s nice to know that you can!
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