When you sell your home, the equity you’ve built typically goes toward your next purchase or other financial goals. But you don’t have to wait until you sell to put your equity to work. Some homeowners choose to access their equity to help cover larger expenses or consolidate existing debts.
Common ways people use home equity include:
Because using home equity involves borrowing against your home, it’s important to consider how it fits into your overall financial picture before moving forward.
When Does My Home Equity Start Growing?
What Can You Use A Home Equity Loan For?
What Is A Home Equity Agreement?
Things To Consider Before Using Your Home Equity
Take The Next Step With Your Home Equity
Of course, most homeowners don’t buy a house outright. Instead, they use a mortgage and build equity over time as they make payments and as the value of their home increases.
Here's how home equity is calculated:
Current Appraised Value - What You Owe On Your Mortgage = Your Home Equity
Your home equity starts growing right away after you purchase a home. Even if you have a mortgage, your home equity typically doesn't start at zero.
The money you saved for your down payment is the foundation of your equity. The more you put down, the more equity you start with. For example, if you make a 5% down payment, you already have 5% equity in your home before you make your first mortgage payment.
Now that you have a better understanding of what home equity is, let’s talk about how it grows over time.
Here are the three main ways it happens:
Every time you make a mortgage payment, you're increasing your equity. The portion of your payment that goes toward the principal is what increases your equity, not the interest. Early in your loan term, payments are more interest-heavy, so equity grows slowly at first. But as time goes on, or if you make extra payments toward the principal, you’ll start to see your home equity grow faster.
If you’re curious how much progress you’ve already made, check your year-end mortgage statement. It breaks down how much of your payments went toward reducing your loan balance and how much went to interest.
While your monthly mortgage payments gradually build equity over time, improving your home’s value may speed things up. Investing in home improvements that go beyond basic maintenance and repairs may add value to the property, which helps to increase your equity.
Common upgrades include:
Not every upgrade will increase your home’s value, and some projects may add less equity than they cost. That’s why it’s important to research the return on investment to make sure the upgrade works in your favor.
Did you know that the price you paid for your home may not be what your home is worth today? Your home’s market value reflects what a buyer would realistically pay for it in the current market, and that number may change over time.
The market value of your home might change due to real estate trends and the economy. When demand is high and more people are looking to buy, home values tend to rise. When demand cools, values can level off or even decline.
Because of this, your home equity may rise and fall right along with your home’s market value. For example, let’s say you purchased a home for $300,000, but it’s currently valued at $350,000. That $50,000 increase is additional equity on top of your down payment and the mortgage payments you’ve already made.
Important Note: The opposite may also be true. If market conditions cause your home’s value to drop, your equity may also decrease.
A home equity loan allows you to borrow against the equity you’ve built in your home. Because the loan is secured by your property, it’s often used for larger expenses or longer-term financial needs.
There are several ways homeowners may access home equity, and each option works a little differently.
A home equity line of credit, often called a HELOC,¹ is a revolving line of credit secured by your home. It allows you to borrow funds as needed up to an approved limit and repay what you borrow over time. This flexibility may be helpful when costs are spread out or uncertain.
A home equity loan² provides a lump sum that is repaid through regular monthly payments over a set period. This option may be a better fit when you know how much you need upfront and prefer predictable payments.
A cash-out refinance replaces your existing mortgage with a new one for a higher amount, allowing you to access a portion of your home’s equity in cash. This option may make sense in certain situations, particularly if refinancing is already being considered, but it can also extend the time it takes to repay your mortgage.
Each option comes with different considerations, including costs, repayment structure and risk, so reviewing them carefully is an important step.
When you sell your home, the equity you’ve built goes right into your pocket — or into your next home purchase.
But you don't have to wait until you sell to use your equity. You may tap into it for many different needs with a home equity loan.
Some common ways that home equity loans are used include:
If you have two or more high-interest debt payments, a home equity loan may allow you to pay off those debts and save money on interest. Juggling multiple payments may also be stressful. A late or missed payment could result in a late fee, and it may also affect your credit score. With a home equity loan, you’ll have a single monthly payment, which may help to simplify your finances.
Financing major life events and experiences with a home equity loan may be more affordable than using credit cards or personal loans. Because home equity loans are secured loans, they may offer lower interest rates than unsecured loans. Using your home equity may also help you spread out the cost over time, so you can focus on enjoying the moment instead of worrying about large upfront expenses.
Tuition, housing, books and other education costs can quickly add up. A home equity loan may be a more affordable way to cover those expenses compared to high-interest borrowing options. It may also offer more flexibility for unpredictable costs. For example, with a home equity line of credit (HELOC), you could draw funds as needed for school supplies, a school trip or other expenses as they arise.
The right home improvements may make your home more comfortable and increase its value, but the costs are often difficult to predict. Materials prices could change mid-project, or you could discover something that needs to be repaired while you are removing old materials, which may drive up the cost. With a home equity line of credit (HELOC), you can access funds as you need them up to your credit limit. This flexibility may help you manage unexpected expenses without having to apply for additional financing.
Tapping into your home equity may provide flexibility for certain financial needs, but it’s important to understand the potential risks before applying.
Some things to keep in mind include:
Taking time to review these factors can help you decide whether using home equity fits your long-term plans.
Understanding how home equity works can help you make informed decisions about your financial future. Whether you’re considering using your equity now or simply planning ahead, knowing your options can make it easier to evaluate what fits your goals.
Exploring home equity solutions with a trusted lender may help you better understand how each option works and what to consider before moving forward.
This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.
¹All loans subject to approval. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications and collateral condition. No prepayment penalty. Property insurance is required and will be verified. APR=Annual Percentage Rate. APR: minimum is 4.00% and maximum is 18.00%. Minimum amount: $15,000 and maximum amount: $350,000. The index will be adjusted monthly as of the first day of each billing cycle following an index change. Prime Rate is 6.75%. Floor Rate is 4.00%.
²APR=Annual Percentage Rate. Rates, terms and conditions are subject to change and may vary based on credit worthiness, qualifications and collateral conditions. All loans are subject to approval. Rate shown is for 60 month term. 120 and 180 term loans are also available. Contact us for details. Minimum amount: $15,000 - Maximum amount: $350,000. Property insurance is required and will be verified. No prepayment penalty. An origination fee of $300-$800 will apply based on your total loan amount. Membership is required.