If you own a home, there is a good chance you’re sitting on a nice chunk of equity. According to this report from Black Knight, the average homeowner got a $48,000 bump in their home value, raising the average equity to $185,000 in 2021.
Considering mortgage rates are still historically low, and home values are high, it can be tempting to tap into your home like it is an ATM. With hints of rates going up, and values potentially coming down, it can be even more tempting to rush and pull equity out of your house.
Before you do that, however, consider whether or not you should. Take a look at some reasons to tap into your equity, and some reasons not to pull money out of your house:
Good Reasons
Home improvements
College costs (if the rate is lower than student loan rates you can obtain)
Debt consolidation (if you manage credit well and can use it to lower your payments)
Emergency expenses
Wedding expenses
Business expenses
Not So Good Reasons
Vacations
Buy a car
Risky investments (like “hot” stock tips you read online)
Pay off credit cards (if it is a recurring problem)
If you determine it makes sense to turn your equity into cash, you have a few options:
Cash-out Refinance
This type of loan allows you to refinance your home for a higher amount than you currently owe, and take the difference in cash. For instance, you owe $100,000, take out a $150,000 loan, and get $50,000 cash. This can be a great option if your current mortgage is at a rate that is higher than current rates, or you have paid down your original loan substantially over time.
Home Equity Loan
These are a second mortgage on your home, usually at a higher rate than the first. Lenders may also be a bit more careful about how much they will lend, since these take second position to your original mortgage if the home is foreclosed on.
Home Equity Line of Credit
These are commonly referred to as a “HELOC.” They are also a second mortgage, but in the form of a revolving line of credit, much like a credit card. The rate is often variable and fluctuates with changes in the market, but you can find some that are fixed-rate.
The Takeaway:
The current market conditions are favorable for tapping into your home equity if you have a good amount of it. If you decide to do so, just make sure it is for a good reason. Try not to take out too much equity. Maintaining 20% equity is an ideal benchmark — taking into consideration that values could also drop a bit in the near future — so be safe when estimating how much you are taking out.
No matter what your reason, only do so if you know you can handle the payments and it won’t put your hard-earned equity and home at risk. And, as always, make sure to seek the advice of your financial advisor, estate planner, and / or real estate agent before turning the equity in your home into cash.
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