How to Calculate Home Equity — and Unlock Funds You Need

How much home equity can you use?

The amount of home equity you can use depends on your lender’s policies and your financial situation. Typically, lenders allow you to access up to 80%-85% of your home’s value, minus your mortgage balance.

For example, if your home is valued at $420,000 and your mortgage balance is $200,000, you might be able to access $176,000 to $187,000 of your home equity.

How to unlock and use your home equity

There are several ways to unlock and use your home equity. Here are the most common options:

• Cash-out refinance: A cash-out refinance lets you replace your existing mortgage with a new one for more than you owe and take the difference in cash.
• Home equity loan: A home equity loan is a second mortgage with a fixed rate and term that provides a lump sum of cash.
• Home equity line of credit (HELOC): A HELOC is a revolving line of credit that you can draw from as needed, similar to a credit card, with variable interest rates.
• Bridge loan or Buy Before You Sell program: Home equity is a great way to bridge timing and financial gaps when you need to sell your home and buy a new one. Your equity can allow you to buy before you sell.

How to use home equity to buy before you sell

If you’re a homeowner considering equity financing to purchase a new home without having to move twice, there are modern buy before you sell programs that use your existing equity to streamline and simplify the entire process.

For example, HomeLight’s Buy Before Your Sell platform, with its near-instant Equity Unlock Calculator, makes it easy to use the equity from your current home to make a strong, non-contingent offer on a new home. Here’s how it works:

If your home qualifies, you can get your equity unlock amount approved in 24 hours or less. No cost or commitment is required. Once approved, you can buy your next home with confidence and then sell your current home with more peace of mind.

Unlock Your Equity and Buy Before You Sell

Through our Buy Before You Sell program, HomeLight can help you unlock a portion of your equity upfront to put toward your next home. You can then make a strong offer on your next home with no home sale contingency.

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Why check your home’s equity?

Knowing your home’s equity can offer several benefits:

• Eliminate private mortgage insurance (PMI): If your equity exceeds 20% of your home’s value, you may be able to cancel PMI, reducing your monthly payments.
• Track your property investment: Regularly checking your home equity helps you monitor your investment and make informed financial decisions.
• Plan for future expenses: Knowing your home equity can help you plan for large expenses like home improvements, education costs, or emergencies.
• Refinance opportunities: Higher equity can qualify you for better refinancing terms, potentially lowering your interest rates and monthly payments.

Common reasons homeowners tap into equity

Here are some of the most common reasons homeowners might convert home equity into cash:

• College or other education expenses
• Medical expenses
• Vacation or travel
• Debt consolidation
• Home improvements or renovations
• Purchasing another property
• Major big-ticket item purchase (e.g., car, boat, RV)
• Starting or growing a business
• Paying for a wedding
• Supplement retirement income
• Other investment opportunities
• Emergency expenses

How much does it cost to use home equity?

On average, home equity loan costs will range from 2%-5% of your loan amount. For example, if you took out a $100,000 home equity loan, you might pay between $2,000 and $5,000 in closing costs and fees, depending on your credit score, LTV ratio, and other terms of the lending agreement. Some lenders will offer reduced or discount equity loans to existing customers.

Here are some common expenses you can expect:

• Origination fee
• Credit report fee
• Appraisal fee
• Document preparation fee
• Title search fee
• Title insurance policy
• Notary fee
• Attorney fee (in states where required)

Your loan may also have additional costs, such as annual fees for maintaining the loan or early repayment penalties.

How much more are home equity loan interest rates?

Interest rates on equity-backed loans vary depending on the type of loan or line of credit you choose. In general, because they are considered a second mortgage with higher lender risk, equity-backed loan interest rates tend to be about two or more percentage points higher than rates on a primary mortgage.

Below is a table illustrating what your monthly payments might be on a $100,000 home equity loan.

Source: U.S. Bank home equity loan calculator (As of July 2024 with a 680-729 “good” credit score)

When choosing which term length might work best for you, consider your monthly budget. As illustrated in the table above, a shorter-term loan can have a lower rate. Ultimately, the interest rate you pay will depend on your credit score, loan length, and the lender. As with any service, shop around and compare rates.

HELOCs tend to have variable rates, while home equity loans often have fixed rates. Cor comparison, the current variable annual percentage rate on a $100,000 HELOC might lend at around 10.45%

How long does it take to get a home equity loan?

The time it takes to get a home equity loan can vary, but the process typically takes anywhere from two to six weeks. The timeline depends on several factors, including the lender’s procedures, the complexity of your financial situation, and the need for an appraisal. Here’s a rough outline of the steps involved:

1. Application submission: You’ll need to submit a detailed application to the lender.
2. Document review: The lender will review your financial documents and credit history.
3. Appraisal: An appraisal may be required to determine your home’s value.
4. Approval: Once approved, you’ll receive the loan terms and conditions.
5. Closing: After you agree to the terms, you’ll sign the necessary paperwork, and the funds will be disbursed.

What’s required to get a home equity loan?

To qualify for a home equity loan, you’ll need to meet certain requirements. These typically include:

• Sufficient equity: You usually need at least 15%-20% equity in your home.
• Good credit score: Lenders prefer a credit score of 620 or higher.
• Low debt-to-income ratio: Your monthly debt payments (debt-to-income ratio or DTI) should be below 43% of your gross income.
• Stable income: Proof of steady employment and income is usually necessary.
• Property details: Lenders may require information about your property and its value.

Should I take equity out of my home?

Deciding to tap into your home equity depends on your financial goals and circumstances. Here are some considerations:

• Purpose: Use equity for investments that add value, like home improvements, education, or consolidating high-interest debt.
• Financial stability: Ensure you can manage additional loan payments without straining your budget.
• Interest rates: Compare the interest rates of home equity options with other forms of credit.
• Long-term impact: Consider how taking equity out might affect your financial future and home ownership.

Unlocking your home equity can provide financial flexibility, open new opportunities, or become a much-needed parachute in the face of a family crisis.

While equity can be a powerful tool, plan your borrowing carefully. Always weigh the costs and benefits, and consult with a financial advisor to make the best decision for your situation.

Header Image Source: (Jonathan Cooper / Unsplash)