Best time to pull equity out of your home
The best time to take equity out of your home is when your finances are in order, you have reliable income with which to repay a home equity loan, and have a plan for using the loan, such as making home improvements to increase the value of your home.
When to get a home equity loan can depend on how many years you have owned the home and whether your home has appreciated in value during that time. It can be worthwhile to take equity out of your home to pay off high interest credit card debt or pay college tuition for children or yourself. If you need money for any of these purposes and can meet a lender's loan eligibility requirements, it could be the best time to take equity out of your home.
Read on to learn more about when to get a home equity loan.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
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What is home equity?
Home equity or equity in a house refers to the difference between the balance on your mortgage and the market value of your home; it is the amount of your home that you own that is not encumbered by a first or second mortgage loan. For example, if you do not have a mortgage, then you have 100% equity. If you have a mortgage, the lender "owns" part of your home. As you pay off your mortgage your equity (the amount of the home you own) increases.
When is the best time to use home equity?
The money from a
home equity loan or
HELOC can be used for any number of purposes, as mentioned earlier in this article. When to get a home equity loan may be determined by personal financial needs or other actors. Here are three of the best times to take equity out of your home:
- When property values are high. When property values rise, so does home equity. Your property's assessed value is used to calculate your loan-to-value (LTV) ratio, an essential factor in getting approved for a home equity loan or HELOC. The LTV ratio formula compares the amount of the loan you are seeking to the value of the property and is calculated by the lender during the loan application process. The ratio is used to determine lending risk. If the loan applicant's LTV is too high, the loan is considered high risk, and the loan interest rate will be higher, or the loan will be denied.
- When making home improvements. Making home improvements is one of the best times to take equity out of your home. According to the IRS, interest paid on home equity loans and home equity lines of credit (HELOCs) is tax deductible if the borrowed funds are used to buy, build, or substantially improve the home that secures the loan.
- When the alternative is borrowing from a credit card. Credit cards are known for their notoriously high interest rates charged on any unpaid balance that's carried from month-to-month. If you need a large sum of cash for home improvements, college tuition, paying medical bills, or other needs, then it's a good time to consider taking equity out of your home because home equity loans and HELOCs come with lower interest rates than credit cards.
How can homeowners take equity out of their home?
If you meet lender eligibility requirements, it's fairly easy process to take equity out of your home using one of the following loans:
Home equity loan. A
home equity loan lets you borrow money against the equity in your home. Home equity loans provide money in a lump sum payment and come with a fixed interest rate. Starting the month after you receive the loan, lenders require that the loan be paid back in monthly installments that include paying interest on the entire loan amount, whether you used any of the money or not.
Home equity line of credit (HELOC). A
Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender. HELOCS come with a credit limit, a variable interest rate, and are secured by the equity in your home. One of the benefits of a HELOC is that you only pay interest on the amount of the loan you actually use.
See if you meet the HELOCs eligibility requirements.
Cash-out refinance. A
cash-out refinance involves getting a new mortgage at a new interest rate and borrowing more than what you owe on your current mortgage. The first mortgage is paid off and the extra cash is given to you at closing. If you already have a low interest rate on your current mortgage, refinancing to a higher interest rate just to get cash-out, is probably not a good idea because you will lose your low interest rate which could cost you more in the long run.
Is right now a good time to take equity out of your home?
Deciding whether to take equity out of your home is a personal financial decision that only you can make. If you have stable income and intend to use your home equity to make improvements to your home that will increase its market value, then it could be a good time to get a home equity loan. Interest paid on a home equity loan or HELOC is
tax deductible if the funds are used to buy, build, or substantially improve the home that secures the loan.
When is it not a good idea to take equity out of a home?
It's generally not a good idea to take equity out of your home if your job or income are not stable, you are having difficulty making your current mortgage payments, or you do not plan to stay in your home for very long.
Does your mortgage go up when you take out equity?
No, your current mortgage payment will not increase or change in any way. However, because home equity loans and HELOCs are considered
second mortgages, you will essentially have an additional mortgage payment when you take equity out of your home using one of these loans.
Can I pull equity out of my house without refinancing?
Yes,
home equity loans and
HELOCs do not require you to refinance your current mortgage.
How do I get the most out of my equity?
To get the most out of your home equity, use the money to improve your financial position. This can mean making home improvements to increase your home's market value, using the money to pay off high interest credit card debt or other debts, or using a home equity loan or HELOC to purchase an
investment property.
How do I calculate my home equity?
To
calculate home equity, take the amount your property is currently worth, or the appraised value, and subtract the amount of any existing mortgages on your property.
For example: Appraised value $600,000 – Amount owed on mortgage $250,000 = $350,000 equity. Divide the equity ($350,000) by the home value ($600,000), which is 58% equity. (A homeowner who doesn’t have a mortgage loan has 100% equity in their home.)
What is a good amount of equity in a house?
All lenders have
general requirements they look for when evaluating a borrower’s loan application, which includes home equity of at least 15% to 20%.
Is taking equity out of a home worth it?
A HELOC or home equity loan can be a great financial tool for using your home equity to get some extra cash. But is it worth it? The best way to decide is to run the numbers and honestly evaluate your personal finances. Any loan that requires your home to be used as collateral could jeopardize your home ownership if you become unable to repay the loan. Only you can truly determine the best time to take equity out of your home.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!