How to Make the Most of Your Home Equity
August 30, 2023
The past few years have seen significant increases in home prices. And homeowners — especially those who bought in the early days of the pandemic — have seen their average home equity skyrocket.
“In the past, it has often taken homeowners years to build up equity in their home by making their mortgage payments,” says Tony Pellegrino, Northwest Bank Consumer Direct Lending manager. “But people who bought in the last three years have gained equity at a faster rate than in the past.”
And that equity opens the door to financial freedom. If you’re looking to sell, more equity may cover your closing costs and moving expenses, with cash left over to put toward the new property. But you can also benefit from equity if you plan to stay in your current home.
Here are four ways home equity can help you reach your goals — and three ways you can leverage the equity in your home.
4 ways to maximize your home equity
Try one of these strategies, and use your home equity to build a brighter future.
1. Refinance existing debts
Interest rates are on the rise, which means that carrying debt has become more expensive in the past year — and high-interest debts, like credit cards, have become more difficult to pay off.
Home lending options can help you pay off high-interest debts and replace them with a lower-interest loan. “You’ll save money on interest, and you can also lower your monthly payment by extending your repayment out for years," explains Tim Holman, Northwest Bank vice president and director of Mortgage Operations. “We see some clients save $1,000 a month or more.”
2. Fund a major purchase or home renovation
If you’re planning a wedding, eyeing a new car or need loans for a home improvement project, home equity can provide the money you need to make your purchase. Not only can it help reduce the sticker shock of a big-ticket item by allowing you to pay it off over time, but using home equity may help you save money on interest.
“In general, home equity loans are the cheapest source of funding for a major purchase,” says Holman. “It’s cheaper than any unsecured debt, like a personal loan, and even cheaper than auto loans in some cases.”
3. Pursue an investment opportunity
Building wealth is all about taking advantage of opportunities when they present themselves, and home equity can be the launching pad you need to reach your goals.
“Having a home equity loan can grant you fast access to tens of thousands of dollars, so you can take advantage of investment opportunities when they come up,” says Holman. Home equity can also provide the funds you need to invest in yourself — for example, by pursuing professional development or launching or expanding a business.
4. Supplement your safety net
Building an emergency fund is essential for financial security, but even the most prepared households could be caught off guard by an emergency expense. Home equity can expand your cash buffer by tens of thousands of dollars, so you’re more likely to be prepared for whatever life throws at you.
“Even if you don’t have a purpose for your home equity today, a line of credit can help you gain access to funds in the future,” says Holman. “However, it’s important to set up the line of credit before you need it, so you have immediate access to the funds if the unexpected happens.”
How to unlock the equity in your home
When it comes to accessing home equity, homeowners have three major options:
Fixed-Term Home Equity Loan
A fixed-term home equity loan is a second mortgage: The bank lends you a lump-sum amount, which you’ll pay off over a set period of years.
“The benefit of a fixed-term home equity loan is its stability,” says Pellegrino.
“These are usually fixed-rate loans, so you’ll know what your payments will be for the lifetime of the loan. It’s a great option for borrowers who want a guaranteed rate and set payment.”
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) works more like a credit card. It allows you to make purchases up to the credit limit and pay interest only on what you owe. After a set period of time — usually 10 years — any remaining balance on the HELOC converts into a fixed-term loan that you pay off in regular payments.
“The nice thing about a HELOC is that it’s flexible,” says Pellegrino. “We can set it up for you when you purchase your home so you’ll have the funds available. That means if something comes up in three years, you won’t need to go through the loan process again. ”
Some financial institutions — including Northwest Bank — also allow you to fix the interest rate and payment on a specific balance of your HELOC. As you pay down the fixed portion, those funds in your HELOC come available to use again when you need them.
If you’ve paid off most or all of your existing mortgage, cash-out refinancing may be the right move to access your home equity.
Cash-out refinancing replaces an existing mortgage, if you have one, with a new mortgage for more than you currently owe, providing cash back to the borrower for the difference. If you owed $25,000 on your home and took out a $50,000 mortgage, for instance, you’d receive $25,000 in cash to spend however you want. You’d then pay down the new mortgage with regular monthly payments over a set period of time, up to 30 years.
“Cash-out refinancing makes the most sense when you want to pay money back over a long period of time, since most banks don’t offer home equity loans or HELOCs with 25- to 30-year terms.” says Pellegrino. “And, while mortgage rates are relatively high right now, they are still typically lower than the rate on a home equity loan or line of credit.”
Which option is right for you?
There’s no one-size-fits-all solution to using home equity, and the best choice depends on your preferences, goals and financial plan. But you don’t have to weigh your options alone. Reaching out to a mortgage expert can help you cut through financial jargon to find the answers you need, plus run the numbers to learn how each option would impact your unique financial situation.
We’re here to help. Connect with Northwest Bank’s home lending experts today to learn how to make your home equity work harder for you.