What is home equity?

In an economic climate plagued by decades-high inflation and uneven stock market performance millions of Americans may find themselves looking for new and innovative ways to make ends meet. This can take the form of passive income gigs to refinancing to relying on traditional credit forms like credit cards or personal loans. 

Homeowners have a unique alternative to pursue: their own home. Or, specifically, the equity they have built up during their time in the home. In this article, we will break down what home equity actually is, how to calculate it and how you can then use those funds via a home equity loan or a home equity line of credit (HELOC).

You can explore your home equity loan options online now to see if it’s right for you.

What is home equity?

Simply put: Home equity is the amount of money you currently have invested in your home. 

It’s a combination of the number of payments you have made toward your mortgage principal and the value of your home on the current market. 

Let’s say you initially purchased your home for $500,000 but have made enough payments so that you now owe $400,000. While you’ve been paying your mortgage, your home’s value has increased from $500,000 to $600,000. In this case, you have $200,000 worth of home equity ($100,000 that you’ve paid off of the mortgage loan plus the $100,000 your home has grown in worth).

That said, home equity doesn’t always add up favorably. In some instances, you may have paid your mortgage down but the value of the home has dropped during that same period. In these instances, the only equity you can use will come from the payments you’ve made (not any new value). 

A real estate professional or lending institution can set up a formal appraisal of your home to accurately determine how much equity you currently have.

How can you use your home equity?

If you’re one of the millions of homeowners who have seen their property rise in value in recent months or years then chances are high that you’re sitting on a significant amount of home equity. This can be used in multiple ways to help pay for expenses. Here are two primary ones to know:

Home equity loans

Home equity loans act as a second mortgage for homeowners. Owners simply deduct a portion of the equity they have in their home to use as they see fit. Home equity loans have multiple advantages, namely their lower interest rate and interest tax deduction eligibility if used for IRS-approved home repairs and improvements. 

Explore your home equity loan options here now.

HELOCs

HELOCs work similarly to home equity loans but instead of getting a large sum of money at one time, HELOCs act more as a credit card would. It’s a revolving line of credit to be used as the homeowner sees appropriate. HELOCs also have lower interest rates than credit cards or personal loans and they’re also tax-deductible if used correctly. They’re generally divided into two periods: a draw period when you borrow as much as you want or need (usually limited to 85% of your home’s equity) and a repayment period in which you won’t be able to borrow any more money and will have to pay back what you’ve borrowed.

Explore your HELOC options here now.

The bottom line

Homeowners looking for ways to pay for rising expenses should strongly consider turning to their home – and the equity they’ve built up – as a low-interest credit alternative. Home equity can be used in multiple ways, including with a home equity loan or a HELOC. And if used for eligible reasons the interest the homeowner pays on these credit forms may be tax-deductible for the year it was used.