It’s no secret home prices have soared over the past year. Just ask any home buyer who tried to make an offer on a property only to be shocked at how many other bids there were.
But while higher home values are a bad thing for buyers, they’re a great thing for sellers and property owners. Right now, the latter group is sitting on a record level of equity.
Home equity refers to the portion of your home that you own outright. You can calculate the amount of equity you have in your home by taking its market value — meaning, the price it can sell at — and subtracting your mortgage balance. If you own a home worth $500,000 and you owe $200,000 on your mortgage, it leaves you with $300,000 of equity you can tap.
At the end of 2021, home equity grew to $9.9 trillion on a national level, according to data firm Black Knight. That’s a 35% increase from the previous year. It also leaves the average homeowner with $185,000 of accessible equity.
Having a lot of home equity gives you a number of options — namely because you can borrow against that equity or even cash some of it out.
Say you have home renovations you’ve been hoping to make. If you borrow against your home equity, those renovations could become a reality. You can also use your home equity to pay off unhealthy debt, like a credit card balance. And while it’s a good idea to use your home equity to tackle important financial objectives, you can technically tap that equity for any purpose, which means you can borrow against your home to take a vacation if you so please (even though that’s not advisable).
There are a few options you can employ to tap your home equity. First, you can borrow against your home via a home equity loan or line of credit (HELOC). Neither options require you to get a new mortgage. Rather, you take out a separate loan or line of credit and continue to pay off your existing home loan.
With a home equity loan, you borrow a lump sum of money you pay back in equal installments. The interest rate on that loan will be fixed, which is a good thing right now. Interest rates have been climbing and have the potential to keep doing so this year.
With a HELOC, you get access to a line of credit you can draw from within a preset time frame — usually five to 10 years. You’ll only accrue interest on the portion of your HELOC you tap, so if you get a $10,000 HELOC but borrow $8,000, the other $2,000 won’t create a financial liability for you. HELOC interest is generally variable, though, so you’ll run the risk your interest rate will rise over time.
Finally, you can tap your home equity with a cash-out refinance. This requires you to get a brand-new mortgage — one where you borrow more than your remaining balance and get the rest in cash.
While today’s refinance rates are still competitive, they’ve been climbing steadily. If you’re going to lock yourself into a long-term loan, it could pay to get moving before rates continue to rise.
Having home equity gives you more options. It also puts you in a position where you stand to profit nicely upon selling your home. In fact, the average seller last year walked away with a profit in the ballpark of $94,000, so if you’ve been thinking of listing your home, now may be a good time to do it.
This article was written by Maurie Backman from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to firstname.lastname@example.org.