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How to take equity out of your home

Home equity is one of the financial benefits of owning your own home. Whether you have a mortgage or not, you have equity, which is the amount of the home you own outright, minus any mortgage amount. There are several types of loans created for taking equity out of a home: the home equity loan, the home equity line of credit (HELOC), and the cash-out refinance. If you need a large sum of cash, tapping into your home equity is a popular solution.
 
Read on to learn more about how to get equity out of your home.
 
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 your banking needs.

Get Started on Your Home Equity Line of Credit Today!

What is home equity?

Home equity 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 (ownership) increases.

How to calculate how much equity you have

To calculate home equity, take the amount your property is currently worth or the appraised value, and subtract the amount of any existing mortgage on your property.
 
For example:
If a home's appraised value is $600,000 – the amount owed on the mortgage $250,000 = $350,000 equity.

Pulling equity out of your home: how does it work?

There are several ways homeowners can use home equity to their advantage as a way of getting cash. The most common loans for getting equity out of your home are:
 
Home equity loan. Similar to a HELOC, a home equity loan is based on the equity in your home. These loans have a fixed interest rate for the duration of the loan term. Interest is charged on the entire loan amount you've been given, whether you use the money or not.
 
Home equity line of credit (HELOC). A Home Equity Line of Credit is a type of “revolving” credit, similar to a credit card. HELOCs come with a credit limit based on the amount the borrower is approved for. During the "draw period,” a variable interest rate is charged on the amount of the loan that's used. The draw period is followed by a repayment period when the loan converts to a fixed interest rate.
 
Cash-out refinance. Getting cash-out during the refinance of your mortgage means borrowing more than what you owe on your current mortgage and get a cash disbursement of the extra funds at closing. You can use the cash any way you choose. Refinancing your current mortgage to a new mortgage could help you lower your monthly payments, if you can get a lower interest rate than you currently have. However, if today's rates are higher than your current mortgage interest rate, if you refinance you will lose your low rate.
 
Advantages of tapping into your home's equity
Homeowners who need some extra cash frequently borrow from their home's equity to pay for large purchases and emergency expenses because there are advantages. Other methods of borrowing cash, such as credit cards and personal loans, etc. have risks and costs that many homeowners prefer to avoid.
 

1. Lower interest rates. Home equity loans and HELOCs tend to have lower interest rates than credit cards and personal loans.
2. Spending flexibility. The cash you get from a home equity loan or HELOCs can be used any way you choose.
3. Tax benefits. The interest you pay on a home equity loan or HELOC interest is tax deductible if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.

Disadvantages of using your home's equity

Home equity loans and HELOCs are both considered a second mortgage, and with the additional debt is additional financial risk.

1. Your home will be used as collateral. Home equity loans and HELOCs are secured loans, that use your home as collateral to secure the loan. Failure to repay an y part of the loan could lead to foreclosure by the lender.
2. Risk of being underwater. If the value of your home decreases, you will lose equity and could owe more than your home is worth. This is referred to as being "underwater."
3. Credit and borrowing risks. Failure to make on-time monthly payments will damage your credit score. If you fail to repay the loan and the lender forecloses and takes possession of your home, the foreclosure information will remain in your credit report for seven years from the date of the foreclosure, making it more difficult to get a new mortgage or other loans in the future. Having a home equity loan could increase your debt-to-income ratio, which can also make it more difficult to be approved for other loans or credit.

How much equity can you take out?

The amount of equity you can take out depends on the amount of equity you have. How to get equity out of your home starts with shopping for a lender, who will calculate how much equity you have and determine how much equity you can take out. The lender will also consider other factors in the loan application and approval process, including your past payment history, credit score, your debt-to-income ratio, and your home's loan-to-value ratio.

How can home equity be used?

Home equity and home equity loans can be used any way you’d like. Some of the best ways to use a HELOC include making home improvements, paying for college, consolidating high-interest debt, paying for education tuition, starting a business, and much more.

How long does it take to build equity in a home?

Taking equity out of your home depends on building equity. The time it takes to build equity in a home depends on your current mortgage loan amount and how much extra money you put toward paying down your loan amount. Economic factors, such as your home's market value also affect equity.

How soon can you pull equity out of your home?

If you are a new homeowner, you may be able to start taking equity out of your home shortly after your first mortgage closes. For example, you may get a HELOC 30-45 days after the purchase of a home. However, borrowers will need to meet all the necessary lender requirements, including 15-20% equity in home, good repayment history, and more.

Is using your home equity worth it?

If you need a large chunk of cash for a home renovation project, a wedding, or to pay off large medical bills, a credit card could end up being a more expensive option if you are unable to pay off the full balance right away, taking equity out of home through a home equity loan or a HELOC can be a great way to use your home to get the cash you need. However, taking equity out of your home is a big financial responsibility that requires the income and commitment to repaying the loan on-time and in-full, so as not to risk foreclosure by the lender.

Can I take equity out of my home without refinancing?

Yes, you do not need to refinance your home in order to get a home equity loan or a HELOC.

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!