Overview
Equity is a powerful tool, and the opportunity to build it is one of the biggest perks of homeownership. You can borrow from it, profit off it, or use it to improve your home, and it’s a great way to build wealth over the long term.
But what exactly is equity, and how can you build and use it? Here’s what you need to know.
What is Home Equity
Put simply, home equity is the portion of your home you actually own. It’s the value of your home, minus any mortgage balance you have on it. So, for example, if your home is worth $400,000 and you have a $250,000 mortgage balance, then you have $150,000 in equity (400,000 minus 250,000).
Note: For your home’s value, you can use the price you purchased it at (if that was recently) or your home’s appraised value. You should get this in the mail annually from your local tax appraisal department.
How to Build Home Equity
You can build equity in one of two ways: by improving your home’s value or reducing the loan balances against the property.
Improving your home’s value can happen organically, as the housing market in your area heats up or demand for homes like yours rises. You can also add value yourself by making strategic updates, like adding a new roof, renovating the kitchen, or installing a back patio.
Reducing your loan balances also improves your equity. This happens every time you make a mortgage payment each month or, if you come into extra cash (maybe your tax refund or holiday bonus, for instance), you can make an extra payment toward your loan balance and help even more.
Uses for Home Equity
The more home equity you have, the more profits you’ll likely see when it comes time to sell your house. But in the meantime, while you’re still in the house, you can also borrow from your home equity, too.
There are several options for doing this, including:
Home equity loans: With a home equity loan, you’ll get a lump sum of cash you can use however you like. These usually come with fixed interest rates.
HELOCs: Home equity lines of credit (HELOCs) turn a portion of your equity into a credit line, which you can withdraw from over several years as you need it. These often have variable interest rates.
Cash-out refinancing: This move replaces your current mortgage loan with a new, larger-balance one. You then get the difference between those two loan balances back in cash. Keep in mind that the new loan will have a different rate and payment than your old one, so make sure to run the numbers before going forward. Depending on current market conditions, it may or may not work in your favor.
Reverse mortgages: Homeowners 62 or older can use a reverse mortgage to borrow from their home equity. With this option, you can turn your equity into monthly payments, a credit line, or a lump sum payment. You don’t repay the loan until you move out, sell the house, or pass away.
Many homeowners borrow from their home equity to cover home repairs or renovations or to consolidate debt. Home equity loans tend to have lower interest rates than other forms of borrowing, so using equity to pay those balances off can usually save you on long-term interest costs.
3 Home Equity Companies to Consider
Many banks and mortgage lenders offer home equity products, so it’s important to shop around and compare your options before deciding where to get your loan. Some options include:
Rocket Mortgage
- Best For: Low credit scores
Rocket Mortgage Loans
Rocket Mortgage is one of the biggest names in the mortgage business, and while they don’t offer HELOCs or reverse mortgages, they do have home equity loans. And on those? The minimum credit score is just 580. You can also apply totally online, and cash-out refinancing is an option, too.
Our quick take
Rocket Mortgage didn’t get to the top of the mortgage world by accident. They keep things focused with no HELOCs or reverse mortgages, but their home equity loans are solid. A 580 minimum credit score opens the door for a lot of people, and being able to apply online (plus the cash-out refi option) makes the whole process feel refreshingly straightforward.
Pros and Cons
Pros
All online
Serves all 50 states
Low credit score requirement
Cons
No HELOCs
No reverse mortgages
PNC Bank
- Best For: HELOC's
PNC Bank
PNC Bank offers both home equity loans and HELOCs, but its HELOCs are particularly notable. These let you borrow up to 89.9% of your home’s equity, and there are both fixed-rate and variable-rate options (you can even switch between these after closing).
Our quick take
PNC Bank offers both home equity loans and HELOCs — but it’s the HELOC that deserves your attention. You can tap up to 89.9% of your home’s equity, pick the rate structure that fits your life, and if things change down the road, you can switch between fixed and variable after closing. That kind of flexibility is rare.
Pros and cons
Pros
Offers both home equity loans and HELOCs
Fixed- and variable-rate options
High borrowing limit
Cons
Comes with fees
Not available in all 50 states
SoFi
- Best For: Home equity loans
SoFi Loans
With SoFi’s home equity loans, you can borrow up to $750,000 — or 85% of your home’s equity, and you can complete your application fully online. There are also no-fee options, and the lender has strong reviews from past customers, too.
Our quick take
Imagine unlocking up to $750,000 of your home’s value, up to 85% of your equity, without ever stepping into a bank. SoFi lets you do it all online, keeps the fees out of the picture, and has the glowing reviews to back it up. Pretty great if you ask us.
Pros and Cons
Pros
All online
High borrowing limit
No fee options
Cons
Credit score minimum is 680
Not available in all 50 states
Compare Your Options
There are many companies that offer home equity loans, HELOCs, and other equity products, so make sure to compare several before deciding where to borrow. You should also prep your budget and ensure you have the cash for your new payment. Home equity loans and HELOCs use your home as collateral, so if you fail to make your monthly payments, your lender could foreclose on your house.
The Point
More equity means more profits when you sell your home. It also gives you a powerful resource should you ever need cash down the line, so understanding what it is, how to build it, and how to borrow from it is critical as a homeowner. Talk to a mortgage professional if you want to learn more about your current home equity options.
by your friends at The Daily Navigator
