How to Tap Into Your Home’s Equity

How to Tap Into Your Home’s Equity

Homeownership comes with many benefits. Among them: more freedom, more privacy, and more space. It’s no surprise so many people pursue homeownership as a major life goal. And as homeowners make their mortgage payments, another benefit of homeownership starts to take shape: equity.

For those who don’t know, equity refers to the difference between what you still owe on a house and what the house is worth. For example, if the house is valued at $250,000 and there’s $100,000 left on the mortgage, the equity in your home would be $150,000.

Home equity is important because it can be turned into cash in your pocket. What’s more, there are many ways in which homeowners can access equity in their homes. With this in mind, let’s take a look at six ways to tap into your home’s equity:

Home Equity Loans

Home equity loans are pretty straightforward. Homeowners use their home’s equity as collateral in order to get a loan from a bank. The loan sum doesn’t have to be the total amount of equity available; homeowners can borrow as much or as little as they want. However, given the number of lenders out there, it’s essential for homeowners to be selective when applying for a home equity loan. More times than not, the best option is to go through your personal bank or the one through which the original home loan was borrowed.

Home Equity Line of Credit (HELOC)

A home equity line of credit is nearly identical to a home equity loan but with a few key differences. These differences amount to the same ones that exist between ordinary loans and lines of credit; rather than taking out a loan, you’re gaining access to a line of credit, the value of which depends on the equity in your home. The benefit of HELOCs is they enable homeowners to tap into their home’s equity as they see fit over time rather than utilize it on an individual borrowing basis.

Reverse Mortgage

Reverse mortgage options have been around for decades, but there’s still confusion over what they offer. As the name suggests, reverse mortgages involve trading the equity in your home for a monthly payment. The primary benefit of reverse mortgages is they enable you to essentially sell your home but remain living there. The catch is you have to be 65 or older to qualify. Furthermore, ownership of the house is transferred to the lender upon death unless your heirs decide to buy it back outright or take out a new mortgage.

Sale-Leaseback (SLB)

There was a time when homeowners could easily buy a new house before selling the one they currently own. Then the subprime mortgage crisis happened and banks became skittish about approving home loans for those still tied to an existing mortgage. The solution – for many – is something referred to as the sale leaseback agreement option. An SLB lets homeowners sell their existing house but continue to live there, giving them the flexibility to shop for new homes in the meantime.

Cash-Out Refinance

Cash-out refinance options are great for those planning on staying in their homes for the foreseeable future. They essentially let homeowners start over on their mortgage, ideally with a lower interest rate. The equity they’ve accumulated is then returned to them, which can be used for just about anything from home repairs to tuition payments to vacations overseas.

Selling Your House

The simplest way to tap into the equity in your home is to put your home up for sale and wait for the best offer. While the equity itself is never directly utilized, the sale of the home results in the homeowner receiving every dollar minus what they still owe to the bank. While SLBs are still the way to go if you’re looking to buy a new house but lack the collateral to do so without selling your existing home, a traditional sale is ideal for folks planning on downsizing to a rental, which is often the case for those about to enter retirement.

Homeownership comes with many perks. Among them is the accumulation of equity over time. The best way to tap into your home’s equity depends on the situation. With so many options to choose from, you’re sure to find one that suits your life goals.

About the author


Mike K. Watson

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