Real estate prices are rising fast, and that means home equity is likely to have risen as well. In fact, research firm Black Knight found that tapable home equity hit a record high in the third quarter of last year. And with HELOC and home equity interest rates currently low (some HELOC interest rates now start at around 3% (Check out the best fares you qualify for here), many homeowners wonder what, if anything, to do with that equity.
What is home ownership?
Put simply, home equity is the difference between what you owe on your mortgage and what your home is worth now. But Greg McBride, chief financial analyst at Bankrate, warns homeowners that how much equity you have doesn’t equate to how much money you have in the bank. “If you sell, your proceeds will be less than the amount of equity due to commissions and closing costs,” he says.
How do I find out how much equity is in my house?
The rough math is simple: just subtract the amount of money you owe on your mortgage from the current value of your home. “If you are unsure of the value of your home, you can estimate it by checking the prices of similar homes that have recently been sold in your area. Or, if you want a more accurate estimate, you can order a home appraisal, says Jacob Channel, senior economic analyst at LendingTree.
What can I do with my home equity?
All you have to do is bask in the fact that you would probably get more money now than you did a year ago if you sold your home. But you can also tap into that home equity: “You can consider taking out a home equity loan, getting a home equity line of credit (HELOC), or applying for a payout refinance,” says Channel. These options provide a homeowner with money to use for a variety of purposes, but remember, if you don’t pay them back, you could lose your home. And note that not all uses of that money are considered equal, pros say. Better uses include needed home renovations or improvements, paying off high-interest debt, or paying for an emergency you couldn’t otherwise afford. You can read our guide to choosing between a HELOC and home equity loan here.
You may also want to consider refinancing. If you haven’t refinanced your mortgage in the last 18 months, today’s interest rates are likely a good deal lower than what you’re currently paying, making a mortgage refinance with payout an option. “Otherwise, a home equity loan or line of credit offers an interest rate in the neighborhood of 4% to 5%. Some home equity lines offer an introductory interest rate that could be under 3% for the first few months,” says McBride.
In order to assess your personal situation and how you can best benefit from raising equity from your home, it may be wise to seek input from an expert. “If you’re curious about the different ways you can use your home equity, reach out to your lender and ask what options are based on how much equity you have and other factors like your income and credit history,” says Channel.