Home equity hit an all-time high in 2022
As housing values continue to soar, borrowers reap the benefits in the form of home equity gains.
Mortgaged homeowners saw a collective equity increase of $3.6 trillion annually in the second quarter of 2022, according to CoreLogic. The average borrower now sits on about $300,000 in home equity — the highest amount on record.
How can you use home equity?
Since home equity is tied up in your property, it needs to be converted into liquid cash in order to be used. There are three main ways to do this: a home equity loan (HEL), a home equity line of credit (HELOC), or a cash-out refinance.
With a home equity loan, you keep your existing mortgage and take out a second loan against your property. These typically have lower closing costs but may come with slightly higher interest rates compared to cash-out refis. Here is a list of everything you need for taking out a home equity loan this year.
“For many households, home equity is the only source of wealth creation. As a result, recent record gains in equity… will provide many owners with a financial buffer in case economic conditions worsen”–Selma Hepp, Office of Chief Economist, CoreLogic
HELOCs work similarly to credit cards, with borrowing limits that can be repaid and reused. They usually come with variable rates and low or no closing costs, and you pay interest only on the outstanding loan balance. HELOCs also have set “draw periods” after which you have to repay the remaining balance in full. Here is a full list of HELOC requirements.
With a cash-out refi, you replace your existing home loan with a new primary mortgage. The new loan’s balance will be larger than what you owed, but that difference gets returned to you as cash. Refinance closing costs average around 2-5% of the loan amount and usually get taken out of your cash back total. See if you qualify for a cash-out refi.
Once you’ve cashed out your equity, it can be used for just about anything you want. Many homeowners tap equity to complete home improvements or repairs, consolidate high-interest debt into one cheaper loan payment, or make a down payment on a vacation home or rental property.
How do I calculate my home equity?
Home equity is the amount of cash value built up in your property. As you pay down your mortgage and housing values increase, your equity grows.
To figure out your total equity, take your home’s current value and subtract your mortgage balance. If your house is worth $400,000 and your loan balance is $250,000, then you have $150,000 in equity.
Getting an estimated property value requires using an online evaluator, researching recent comparable home sales in your area, or paying for an appraisal. Your lender can assist you in this process and figure out the best way to take advantage of your equity.
How much equity can I take out of my house?
Borrowers typically can’t cash out their entire equity amount. While exceptions exist, lenders normally prefer to keep 20% of your home’s value untouched as protection in case of a default. The remainder is referred to as “tappable” equity.
Based on the example above, your 20% buffer comes out to $80,000 ($400,000 x 0.2). After subtracting that from your total equity, you end up with $70,000 in tappable equity ($150,000 - $80,000).
“For many households, home equity is the only source of wealth creation. As a result, recent record gains in equity and record declines in loan-to-value ratios will provide many owners with a financial buffer in case economic conditions worsen,” said Selma Hepp, CoreLogic’s interim lead for the Office of Chief Economist.
Your next steps
If you’re ready to use the equity built up in your property, now is a great time to get started.
The best way to figure out how much you can borrow and which loan type to use is to talk with your lender. They can walk you through property valuations, what loan(s) you qualify for, and how to best tap your home’s cash value.
After all, taking advantage of your equity is one of the biggest benefits of owning a home.