Updated: June 9, 2022 at 10:48 a.m. ET
A HELOC and home equity loan are some of the options for borrowing against the equity you have built up in your home. But there are risks.
Getty ImagesHousing prices are rising fast and that means one’s home equity is likely to have gone up as well. Indeed, research firm Black Knight found that tappable home equity has hit a record high. So many homeowners, especially those pondering some home improvements, are wondering: Might a HELOC of home equity loan be the right choice for me (you can see the best rates you qualify for here)?
What is home equity?
In simple terms, 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, cautions homeowners that the amount of equity they have is not the same as money in the bank. “If you sell, your proceeds will be less than the amount of equity because of commission and closing costs,” he say.
How do I figure out how much equity is in my home?
The rough math is easy: simply subtract the amount of money you owe on your mortgage from the current value of your home. “If you’re unsure of your home’s value, you can estimate it by checking the prices of similar homes that have recently sold in your area. Or, if you want a more precise estimate, you can order a home appraisal, says Jacob Channel, senior economic analyst at LendingTree.
What can I do with my home equity?
You don’t need to do anything except bask in the fact that, were you to sell your home, you’d probably get more cash now that you did a year ago. 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 cash-out refinance,” says Channel. (You can see the best rates you qualify for here.)
These options provide a homeowner with money they can use for a variety of purposes, but remember, if you don’t pay them off, you could lose your house. And note that not all uses of this money are considered equal, pros say. Among the better uses are needed home renovations or improvements, to repay high-interest debt, or to pay for an emergency you couldn’t otherwise afford. You can read our guide on choosing between a HELOC and home equity loan here.
You could also consider refinancing, though since rates have risen, that might not make sense for you now. “Otherwise a home equity loan or line of credit offers a rate in the 4% to 5% neighborhood. Some home equity lines offer an introductory rate that could be below 3% for the first several months,” says McBride.
For a take on your personal situation and how pulling equity out of your home can best benefit you, it can be wise to seek an expert’s input. “If you’re curious about the different ways you can tap into your home equity, contact your lender and ask them what your options are based on the amount of equity you have and other factors like your income and credit score,” says Channel.
The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.
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Home equity is determined by subtracting the amount you still owe on your mortgage from the current market value of your home. It will tell you how much you could make from selling your home, or how big of a home equity loan you can take out. Your home equity will increase as you pay off your loan, or as your home increases in value. Here’s how to determine home equity.
1. Find your home’s current market value.
The price you paid for your home may not be the current value of your home. To calculate your home equity, you will need the most up-to-date estimate on your home’s worth. You can find that information by typing your home address into the search box on Redfin.com, and then viewing the page with all the details on your home. An estimated value of your home, called the Redfin Estimate, is displayed next to the last-sold price. You can also contact a Redfin real estate agent to discuss what your home is worth.
2. Subtract your mortgage balance.
Once you have the current market value of your home, subtract the amount you still owe on your home mortgage and related loans from the estimate. This will reveal your current home equity.
3. See what you can earn.
Commonly Asked Home Equity Questions
What is home equity?
Home equity is the amount of your home that you actually own.
How is home equity calculated?
Home equity is calculated by subtracting the amount you still owe on your mortgage from the current market value of your home.
Can you have negative equity?
Yes. With standard loans, your home equity will increase over time. With negative-amortizing loans — a loan with monthly payments less than the interest rates — your equity decreases over time as your owed balance increases.
It is also important to remember that home equity fluctuates depending on current market conditions. If your $500,000 home increases in value to $600,000, your equity with a $400,000 loan is $200,000. If your $500,000 home decreases in value to $300,000, your equity with a $400,000 loan will turn into a negative $100,000 equity.
Can you increase your home equity?
Yes! You can take steps to improve your home equity by performing touch ups and making modern updates. Learn how to increase your home appraisal value.
What Are Home Equity Loans?
If you’re not interested in selling just yet, you can also use your home equity to take out a loan. Get in touch with an agent in your area for a free consultation.