How to Use Your Home Equity

One benefit of owning a home is the ability to tap into your home equity. Equity is the portion of your home’s value that you own, which can be used as collateral for various life goals or projects.

In this guide, we’ll share how you can tap into your home equity, ways to use your home equity to cover large expenses and things to consider before you borrow.

1. Calculate how much equity you have

The amount of equity you have access to is based on the current market value of your home minus any outstanding mortgage debt. Here’s how to calculate home equity:

• Find your home’s current market value. You can use Zillow’s Home Value Estimator or look up comparable homes in your area.
• Subtract your remaining mortgage balance from that value.
• The result is your home equity — the portion of your home you truly own. 

For example: If your home’s current market value is $400,000 and your remaining mortgage balance is $250,000, your equity is $150,000.

2. Choose how to spend your equity

Here are some of the most common ways homeowners choose to put their equity to work:

Make home improvements

Have you been dreaming of renovating your kitchen or adding a new bathroom? You can finance home improvements through a home equity line of credit or cash-out refinance. When you use your equity, you’ll likely secure a much lower interest rate than you would with a personal loan or credit card. Using the equity for home improvements may also increase your home’s value, putting you in a better position to sell your home for more money. 

Consolidate debt

By consolidating your high-interest debts into a single home equity loan or cash-out refinance, you streamline your finances into one monthly payment. With interest rates on credit cards and personal loans often exceeding 10%, refinancing could save you a significant amount on interest payments over time.

Let’s say you have $25,000 in credit card balances at an 18% interest rate. That could cost more than $4,500 in interest over two years if you only make minimum payments. If you use a home equity loan at 7% to pay off those balances instead, you’d pay roughly $1,750 in interest over the same period — saving about $2,750 in interest while simplifying your payments into one lower monthly bill.

Pay off student loans

Some homeowners use a home equity loan or cash-out refinance to pay down student loan balances. In this scenario, you’re borrowing against your home’s value and using the funds to pay off the student debt yourself. Depending on your credit profile and the rate environment, the new loan’s interest rate may be lower than the rate on your existing student loans.

However, this approach has important trade-offs. Your student loan debt isn’t eliminated — it’s converted into debt secured by your home. That means you also give up access to federal student loan benefits such as income-driven repayment plans, potential forgiveness programs, and certain tax deductions. And if you default on this payment, your home could be foreclosed on, which is not a risk of standard student loans. Make sure you understand the long-term implications before moving forward.

Cover medical bills

You can use a home equity line of credit, loan or cash-out refinance to cover a wide range of healthcare costs, including:

• Deductibles and copays
• Prescription medications
• Expenses not covered by insurance
• Daily living costs if you’re unable to work
• Travel to and from medical facilities

The flexibility of these refinance options means your medical expenses are covered if your health insurance falls short.

Start a business

For aspiring entrepreneurs, funding a new business venture can be a major hurdle. If you’re a homeowner, a home equity loan may offer a more accessible financing option to provide the startup capital you need. The funds can be used for various business purposes, from buying inventory to marketing your new venture.

Make an investment

With a cash-out refinance, you replace your existing mortgage with a new, larger loan and receive the difference in cash — money you could use to purchase a rental property, fund an investment account, or diversify your portfolio beyond real estate.

If you’re a homeowner age 62 or older, a reverse mortgage can also provide a stream of funds to supplement retirement income or support long-term investment goals.

3. Get a refinance

To access your home’s equity, you’ll need to refinance your mortgage to access the cash or open a revolving credit line. You have four main options: A home equity loan, a HELOC, a cash-out refinance and a reverse mortgage. These refinance options use your home as collateral for the loan, which means it’s important to make on-time payments to avoid foreclosure. 

Each refinance option has different terms designed to suit your specific financial needs. Talking to a licensed financial advisor will help you assess these options for your personal financial assistant.

Home equity line of credit (HELOC)

A home equity line of credit, or HELOC, provides a credit limit you can borrow against as needed, similarly to a credit card, and you only pay interest on the amount you borrow. This is why a HELOC is also considered a second mortgage. The interest rate on a HELOC often adjusts periodically. You must pay it back in full at the end of a predetermined time.

Home equity loan

A home equity loan allows you to borrow a lump sum at once and pay a fixed interest rate on that amount over a set period. Less common than HELOCs, a home equity loan is also a type of second mortgage. This can be a good option if you know the exact amount you need for a specific project.

Cash-out refinance

With a cash-out refinance, you get a new mortgage for more than the unpaid principal balance on your old loan. You use it to pay off your old mortgage, and then have additional money left over for other expenses.

Reverse mortgage

A reverse mortgage is a loan for qualified homeowners aged 62 or older. It allows you to convert a portion of your home’s equity into cash. You can receive this cash as a line of credit, monthly payments, a lump sum, or a combination. Unlike a standard mortgage, a reverse mortgage requires no repayment until the borrower no longer lives in the residence. However, borrowers must still pay for real estate taxes, homeowners insurance, and any other property-related fees.

4. Consider the risks

Before you decide to borrow against your home, it’s crucial to weigh the benefits against the risks. Carefully compare your borrowing options and think about how you will use the funds. Is using your home equity for these purposes a good idea for you?

Your home is used as collateral

When you take out a home equity loan, HELOC, or cash-out refinance, your home secures the debt. This is the most significant risk involved. If you fail to make payments on time, you could face foreclosure and lose your home. Unlike unsecured debt like credit cards, secured debt puts your property on the line.

Lower interest rates

Typically, home equity financing comes with lower interest rates than unsecured options like personal loans or credit cards, which can save you thousands in interest. However, a HELOC usually has a variable interest rate. This means your monthly payments can fluctuate and may increase if market rates go up. A home equity loan generally has a fixed rate, offering more predictable payments.

Home values can decline

The real estate market can be unpredictable. If home values in your area drop, you could find yourself “underwater,” owing more on your mortgage and home equity loans combined than what your home is worth. This could make it very difficult to sell or refinance in the future.

Your debt will increase

Tapping into your equity increases your overall debt load. This can put a strain on your monthly budget. Even if you use the funds to consolidate other debts, you could end up in a worse financial position if you accumulate new balances on your credit cards.

Closing costs and fees

Refinancing usually involves closing costs, which can range from 2% to 6% of the remaining loan’s principal. You will also face fees for services like home appraisals, loan origination, and title searches. These fees can add thousands of dollars to your upfront costs.

Borrowing limits

Lenders determine your borrowing limit based on your home’s current market value, which is established by a professional appraiser. You can only borrow against the equity you have available. While having access to a large amount of credit can be tempting, borrowing more than you truly need can create a cycle of debt that is difficult to repay.

5. Decide if the extra cash is worth the risk

Before borrowing against your home equity, take a comprehensive look at your financial situation. Assess your home’s current value, your available equity, and your personal financial stability, including your credit score and debt-to-income ratio. Consider the total costs involved — including fees and interest — and confirm your ability to repay the new debt to avoid the risk of foreclosure. By defining clear financial goals and creating a realistic budget, you can ensure you’re prepared for a refinance to unlock your home equity.

This article is provided for informational purposes only. It is not real estate, legal, tax, or financial advice. Speak to a licensed professional for personalized advice specific to your needs.