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Your home has never been a more powerful asset

Here’s how to cash in on record levels of home equity.

With house prices still high and near-record equity levels, now may be an excellent time to convert your equity into cash via a home equity loan or HELOC.

With house prices still high and near-record equity levels, now may be an excellent time to convert your equity into cash via a home equity loan or HELOC.

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Homeowners held record levels of equity last year. According to CoreLogic, the average borrower had $280,000 in home equity in early 2022 — a gain of $64,000 over the previous year and a whopping $125,000 over five years. Not much has changed. "While equity gains contracted in late 2022 due to home price declines in some regions, U.S. homeowners on average still have about $270,000 in equity, nearly $90,000 more than they had at the onset of the pandemic," says Selma Hepp, chief economist for CoreLogic

With house prices still high and near-record equity levels, now may be an excellent time to convert your equity into cash via a home equity loan or HELOC. Here's how. 

What is home equity?

One of the biggest perks of homeownership is the opportunity to build wealth. As you pay down your mortgage, you build equity — the dollar amount of your home that you own. Of course, the housing market also plays a role: If home prices rise, your equity may increase, and vice versa.  

To estimate your home equity, take your home's current value and subtract your mortgage balance. For instance, if your home's value is $400,000 and you owe $250,000, your equity would be $150,000 ($400,000 - $250,000 = $150,000). 

If the result is above zero, you have positive equity (a good thing) and may be able to borrow against it. However, if it's below zero, you have negative equity. That means you owe more than your home is worth — sometimes called being "underwater" on your mortgage. 

How can you tap home equity?

With enough equity, you can borrow using your home as collateral. And right now, many U.S. homeowners hold record (or near-record) levels of equity

Two options for tapping your equity are home equity loans and HELOCs. With a home equity loan, your lender provides an upfront, lump-sum payment that you repay over a set term, such as five to 15 years. With HELOCs, you get access to a revolving line of credit you can "draw" from over five to 10 years before a repayment period begins.  

TIP: Another way to tap your home equity is through a cash-out refinance, which replaces your existing mortgage with a new, bigger one — while you pocket the extra cash. However, mortgage rates are currently high, so a cash-out refinance may not be a good option for homeowners who have a low rate locked in. 

What can you do with home equity?

You can spend cash from a home equity loan or HELOC however you wish. For example, you can use it for:

  • Home improvements
  • College and continuing education 
  • Debt consolidation
  • An emergency fund
  • Medical expenses
  • Starting (or growing) a business

Of course, while you could use the funds for virtually anything, it's best to focus on things that:

  1. Boost your home's value
  2. Improve your financial situation 

In other words, using the cash for an over-the-top vacation or a risky investment (e.g., crypto) is not a good idea. Remember: You're borrowing against your home — which you could lose to foreclosure if you fall behind on the payments. So, be smart about spending the money and confident you can manage the payments before making any decisions.  

Home equity and HELOC rates

The average credit card interest rate is currently about 20%. So, for example, if you have a $5,000 balance on your credit card and make the minimum payment ($100) each month, it will take 109 months to pay off that debt — including nearly $6,000 in interest. Rates for personal loans range from 10.73% to 32%, depending on your credit score. 

Because your house serves as collateral, the best home equity loan rates and HELOC rates are typically better than those of credit cards, personal loans, and other types of unsecured debt. This can make home equity loans and HELOCs very attractive to homeowners needing extra cash. 

According to Bankrate, the average home equity loan rates as of March 22 are:

  • 10-year fixed: 8.13%
  • 15-year fixed: 8.08

The average HELOC rate is a bit lower at 7.76% — but remember that the rate you receive for either depends on your credit score and other factors. 

Home equity loan vs. HELOC

Home equity loans and HELOCs let you borrow money using your home as collateral, but they work differently. Deciding between the two can be tricky, but it often comes down to how and when you plan to use the funds.

For example, a home equity loan might make more sense if you have a specific financial need for a particular project — like $10,000 to remodel a bathroom. On the other hand, a HELOC might be the right choice if you're doing major renovations and don't know what it will cost — or how long it will take. 

Here's a quick comparison to help you decide:

TIP: You may be able to deduct your home equity loan or HELOC interest if you use the money to "buy, build, or substantially improve" the home that secures the loan. IRS rules are very specific, so consulting a tax preparer or financial advisor for guidance can be helpful. 

Home equity loan and HELOC requirements

Whether you opt for a home equity loan or HELOC, your lender will want to ensure you can manage the payments. The qualifications vary by lender, but they generally require you to have a:

  • Minimum of 15% to 20% of home equity
  • Credit score of 680 or higher, though many lenders prefer at least 700
  • Steady income record that your lender can verify
  • Debt-to-income (DTI) ratio no greater than 43%
  • An appraisal that confirms your home's current value

How to get a home equity loan or HELOC

If you decide a home equity loan or HELOC is right for you — and you're confident you meet the minimum requirements — here are the basic steps involved:

  • Choose a lender: You can find the best home equity loan rates or HELOC rates by comparing deals from at least three lenders.
  • Apply: You'll provide information about your income, debt, and home and submit several financial documents.
  • Get an appraisal: If your lender wants an appraisal, they'll arrange one with an appraiser familiar with your real estate market.
  • Underwriting: An underwriter reviews your application, supporting documents, and appraisal report to decide whether to approve or deny your application.
  • Closing: If approved, you'll meet with your lender, notary, and attorney (if required) to sign documents and finalize the loan. 

Bottom line

If you're considering a home equity loan or HELOC, you may wonder when will housing prices drop? After all, home equity levels are tied to home values. While many real estate markets are experiencing price drops, housing experts generally don't anticipate a severe decline like homeowners saw during the Great Recession. That means it may be an excellent time to tap your home equity while house prices remain high. 

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.