8 Ways To Unlock $100K+ in Home Equity
For many homeowners, home equity represents one of the largest untapped sources of wealth. But turning that value into usable cash is not always straightforward, and the wrong move can come with long-term consequences.
Mortgage experts explain when and how to access it without wrecking your finances.
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1. Review Your Mortgage Rate Before You Tap Equity
Before taking out any equity, homeowners should look closely at their current mortgage rate, said Thomas Rudzewick, president and CEO of Maspeth Federal Savings.
"If their interest rate is above the current rates, then they could do a traditional cash-out refinance of their current mortgage," Rudzewick told MoneyLion. "If their interest rate is below the current rates, they may want to apply for a Home Equity Line of Credit (HELOC)."
Equity-cash out refinances are best done only when rates are low, said Cody Schuiteboer, the president and CEO of Best Interest Financial.
2. Use a HELOC for Flexible Access To Large Amounts
A HELOC can be one of the most flexible ways to unlock six figures in equity, especially for homeowners who are unsure how much they will need.
"[It's] similar to a credit card, from which they can borrow as much as they want and only pay interest on what they use," Schuiteboer said.
A HELOC typically has a variable rate with a draw period that determines when the borrower can tap into the funds, and more flexible payment plans, according to Brandon Beatty, owner at Southern Hills Home Buyers.
3. Take a Lump Sum With a Home Equity Loan
For homeowners who know exactly how much they need, a home equity loan can provide a predictable way to access a large amount of cash, Schuiteboer said. This predictability can be especially useful for large, one-time expenses like renovations or debt consolidation.
4. Refinance Strategically To Pull Out Cash
A cash-out refinance can unlock significant equity in one transaction, but it only makes sense in the right rate environment, Schuiteboer explained. Homeowners essentially replace their mortgage with a larger one and take the difference in cash. It's essential to compare current and existing loan terms before proceeding, however.
5. Use Equity To Build Net Worth, Not Fund Lifestyle Spending
While homeowners can use their home equity however they want, these experts warned that tapping equity should be done carefully.
"Home equity is most viable when the funds can be invested in something that will generate more interest than is being paid to access the funds," Beatty said.
If you use home equity to go on vacation or buy a fancy car, "you are truly diminishing your home's equity," according to Schuiteboer.
6. Consider Downsizing To Unlock Equity Without Debt
Borrowing is not the only way to access home equity. Selling and moving to a smaller home can free up significant cash and even eliminate payments altogether without incurring new debt, Rudzewick and Beatty pointed out.
"In all honesty, downsizing is the way to go when you realize you don't need all the space your current home provides and that a large mortgage payment is unsustainable," Schuiteboer said.
7. Stress-Test Your Budget Before Borrowing
Just qualifying for a large loan does not mean homeowners can comfortably afford it.
"Ultimately, they are adding another expense to their mix of bills, and they make sure that they won't be eroding their monthly budget," Rudzewick said.
There's an even greater concern, too, Shchuiteboer said -- losing your house entirely, through job loss, interest rate increase or income fluctuations.
8. Evaluate Whether Borrowing Strengthens Your Financial Position
Ultimately, tapping home equity should be treated like any other major financial decision, grounded in math and long-term planning.
Schuiteboer advised: "Calculate your current net worth, add the amount of equity you want to borrow, subtract the interest you pay on borrowed capital and determine if you come out ahead."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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