Everything You Need to Know About Home Equity

Do you find the notion of home equity hopelessly confusing? 

Learn how to build wealth by owning a home and leveraging its value. 

Let’s face it—the fields of real estate and finance are a match made in heaven. To the average person, they’re both endlessly complex and mind-numbingly complicated. 

[Note to reader: keep a good loan officer on speed dial!]

But they’re also incredibly important. 

When most Americans secure a mortgage and finally move into their dream home, they sail off into the sunset without a passing thought about the concept of home equity, which is much different than a property’s value. 

Did you know that over the life of your loan, you can turn your debt into a substantial asset? 

Whether it’s a home equity loan, line of credit, or cash-out refinance, the equity you amass can be used as a powerful wealth-building tool—even while you’re still living in your home. It can also serve as a hefty nestegg to put toward a future home purchase or investment. 

This month, we’re going back to basics with a little help from the experts.

What is home equity? How is it calculated? How can I use it? 

Everest has all these answers and more. 

Let’s go! 

What is home equity? 

Here’s how it works. 

When you first take on a mortgage loan, the majority of equity belongs to the lending institution (depending on your initial down payment). With each monthly payment you make toward your mortgage principal, your home equity (the amount you own) goes up. Your equity also grows any time the property increases in value. 

Put another way, home equity is the difference between the property’s current market value and the amount you still owe the bank. 

But beyond this seemingly simple math equation, keep in mind that your home equity can also decrease if you take out a home equity loan, refinance for a higher amount, or activate a HELOC (home equity line of credit). The amount you own outright may also fluctuate depending on the real estate market. 

“Building your equity egg takes time. And depending on the market conditions, your equity can rise sharply or take a nosedive,” says Lisa Marie Conklin, finance reporter at Realtor.com. “Today, many homeowners are sitting on record-high amounts of equity because of the decades-long boom of low interest rates up until 2022.”

Sweetening the sale

One of the most significant benefits of home equity is using it to offset a future purchase. When it comes time to sell your home, the money you’ve built can be leveraged in a number of ways: 

• Pay off the remaining balance on your mortgage

• Put the money toward other existing debts

• Bank the profit for some other purchase or investment

• Use it for a down payment (hopefully with a better interest rate!)

Experts advise that it’s best to wait until you have at least 20% equity in your home before selling. However, every situation is different. Make sure to follow up with your mortgage broker to discuss. 

Weighing your options

If you’re in need of hard cash, there are various ways to use your home equity. 

There are quite a few products out there—and some may be better suited for your situation than others. Everything boils down to the amount of equity you have, your current interest rate, among other considerations. 

Let’s explore a few. 

Home Equity Line of Credit (HELOC)

A “line of credit” is somewhat different than the typical loan, as once a limit is established, the borrower can choose to withdraw the money as needed. This option may be favorable for those who have enough equity available and find a good deal they want to invest in.

Loan Officer Motti Klein explains, “A home equity line of credit is perfect for people who have a 1st mortgage with a super low rate. Refinancing doesn’t make sense for them because their monthly payments will skyrocket with today’s high rates.”

But if the owner is ever in need of fast cash, they can always take out a line of credit. 

“The rates are higher because HELOCs are based on prime rate plus whatever percentage they add on top of it, but you only pay if you use it.”

Klein notes that most banks will extend a line of credit up to 89% of the home’s value—sometimes up to 95% with a higher rate. There are also different types of HELOCs with diverse payment durations and terms. 

Your loan officer is happy to share more details! 

Home Equity Loan (HEL)

A traditional home equity loan also uses your home equity as collateral, but is delivered in a lump sum (typically with a fixed interest rate). 

“This is not a line of credit but a regular second mortgage,” Klein advises. “On this one you pay full principal and interest right away and the line is usually locked. The idea is that you stay with your first mortgage with the low rate, but you have a second one to use and also pay off.” 

A HEL comes in handy if you’re facing an unexpected emergency, or want to fund some kind of home improvement project. People also use the funds to put toward college tuition, wedding bills, and other personal debts. 

Cash-Out Refinance

And finally, the savings switcheroo! 

With a cash-out refi, homeowners replace their original mortgage with a new one at a higher amount than was previously owed (and ideally at a lower interest rate). This allows the individual access to cash while enabling them to stay in their home. 

This is particularly beneficial if they can secure a better rate, thus reducing their monthly mortgage payment. Oftentimes, homeowners will choose to refinance for a home addition, renovation, or some other big project. 

Investopedia explains, “A lender will determine how much cash you can receive with a cash-out refinance based on bank standards, your property’s loan-to-value ratio, and your credit profile.” 

As always, it’s important to consult with your loan officer, as this particular option should be used strategically depending on market conditions and other factors. 

Now that you know the basics, feel free to borrow boldly (but responsibly!). 

Everest says: your home is your greatest asset

Proudly celebrating

4,437 home refinances

since 2004. 

They don’t call us Everest Equity for nothing.

 If you’re interested in tapping into your home’s 

equity, connect with a loan officer today!