How to Take Full Advantage of Your Home Equity in 2023
Homeownership not only provides a sense of stability and security but can also become a valuable financial asset over time. As you make mortgage payments and the value of your home appreciates, you build equity—the difference between the property’s market value and the amount you owe on your mortgage. This equity can serve as a valuable resource that you can tap into for various financial needs.
The average American homeowner in 2023 has a significant amount of equity built up thanks to dramatic home value increases in recent years. If that’s you, here are some ways you can take full advantage of your home equity and leverage it toward your goals.
Offset Increased Mortgage Interest Rates for Another Home
If you are like many current buyers, the increased interest rates may be giving you pause. Of course if you purchased or refinanced with a 3% interest rate, it is natural to feel hesitation about buying a new home with a 6% interest rate.
While it is true that rates are up, we are not likely to see those 3% rates again any time soon. If you are outgrowing your home, have changing needs, are looking for a new location, or are ready to downsize, moving now may be a necessity. There’s no reason to fear buying a home in this market just because of the interest rates.
If you have home equity built up, you can leverage that equity to offset the increased interest rates. By reinvesting the equity in the form of a higher down payment, your monthly mortgage payment on the new home can still be affordable in spite of changing market conditions.
Fund a Home Renovation
There are three basic ways you can access your home equity without selling the home:
- Home Equity Loan (HEL): With a home equity loan, you receive a lump sum that you repay in fixed monthly installments. This can be beneficial for specific projects with defined costs, like home renovations or consolidating high-interest debt.
- Home Equity Line of Credit (HELOC): A HELOC is a revolving line of credit that works similarly to a credit card. You can borrow as much as you need up to a predetermined limit and only pay interest on the amount you use. HELOCs are versatile and can be used for various expenses, such as education, emergencies, or ongoing home improvements.
- Cash-out refinance: A financial transaction that involves refinancing your existing mortgage with a new loan that has a higher principal balance. The primary goal of a cash-out refinance is to access the equity you’ve built in your home and convert it into liquid cash. This process allows homeowners to borrow against the value of their property, receiving a lump sum of money that can be used for various purposes.
These three options can be used to access your equity to pay for home renovations. The wisest way to do this is to keep resale value in mind, making sure that you are taking equity out, and then reinvesting it in a way that builds that equity back up (and then some).
If you are nearing retirement age and are concerned about affordability and the status of your retirement income, your equity can be used to make the numbers work. Some individuals use home equity to supplement their retirement funds. This can involve downsizing, selling the home, and using the proceeds to fund retirement expenses.
Alternatively, a reverse mortgage—a loan available to homeowners over a certain age—can provide a steady stream of income while allowing you to remain in your home. A reverse mortgage is a financial product designed specifically for older homeowners, who have sufficient equity, that allows them to convert a portion of their home equity into cash while still living in the home. Unlike a traditional mortgage where the homeowner makes monthly payments to the lender, a reverse mortgage pays the homeowner in the form of regular payments, a lump sum, a line of credit, or a combination of these options. The loan is repaid when the homeowner sells the home, moves out permanently, or passes away.