How Home Equity Can Improve Your Financial Situation

Owning a home offers many advantages, with one of the biggest being the gain in equity. For borrowers who have owned a home in the last four years or more, they have likely seen significant equity gains.

According to an early 2024 ICE Mortgage Monitor report, the average homeowner in 2024 holds $299,000 in equity. This is a significant increase from the $182,000 average equity just prior to the pandemic as noted by Selma Hepp, Chief Economist for CoreLogic.

What is equity?

Often the largest asset one has, equity is the difference between what a home is worth, and the amount still owed on the mortgage.

Equity grows in two ways. First, each month a mortgage payment is made, a portion of the payment covers interest and other costs (like property taxes and homeowners insurance) and a portion pays the principal (the actual remaining loan amount), therefore paying down the amount still owed and increasing the equity.

The second way equity grows is through rising home values. In the first quarter of 2024, homeowners on average added $27,958 in equity year-over-year, or a $1.5 trillion gain nationwide. According to a recent article by USA Today, the American home has been an incredible asset, with home equity gains doubling in the last 7 years and quadrupling since 2012. Many American homeowners have a piggy bank at their disposal and may not even realize it.

How to tap in:

Equity is tied to a property; therefore, it must be converted to cash. This can be done either through selling the home or by tapping into it through a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC). These types of loans use the home as collateral, and in doing so, can offer better terms and lower interest rates than unsecured debt like credit cards.

Cash-Out Refinance: As the name implies, a cash-out refinance loan allows borrowers to refinance a current home loan into a new one and receive a lump sum of cash at closing. This option is ideal for borrowers who prefer to manage just one monthly mortgage payment.

Home Equity Loan: With this option, borrowers retain their current mortgage and interest rate, and obtain a new additional loan on just the equity.

Home Equity Line of Credit (HELOC): This loan provides some flexibility. With a  HELOC, borrowers tap into equity only as needed and pay interest on the amount that is drawn. As the borrowed amount is repaid, the available credit is replenished. This is an ideal option for those who want access to borrow as little or as much (of the approved loan amount) as needed in increments throughout a draw period (typically ten years).

How can tapping into home equity improve a financial situation?

Once cash has been accessed from equity, it can be used any way the borrower sees fit. Many borrowers take advantage of the influx of cash to improve their current financial situation, or to avoid taking on new high-interest debt.

Improve financial fitness through these strategies:

Pay off high-interest credit cards & personal loans:

When comparing interest rates, typically the lowest rate will be on mortgages, the highest rate on credit cards and the rate on personal loans will fall somewhere in the middle. Given that the average APR on credit cards in the second quarter of 2024 hovered around 21.51%  and personal loans averaged around 12%, borrowers can save a significant amount of money by using their equity to pay off these debts and potentially get out from drowning in debt.

Use cash instead of high-interest credit for high-ticket purchases:

Tapping into equity can be an attractive option for cash-strapped homeowners. When compared to other financing options, tapping into your equity not only gives you access to money at a relative bargain, but the sheer amount of funds available is much greater!

Right now, the average homeowner has just under $300,000 in equity built up in their home, giving access to potentially more than $100,000 in cash. Compare that to the average maximum limit of $30,000 on credit cards, and you can see why it may be easier to pay cash from your equity for a new vehicle, dream wedding, or another big-ticket item.

Pay off medical bills or student loan debt:

A 2022 study by the Commonwealth Fund found that half of adults would not be able to cover a medical bill of $1,000 out of pocket within 30 days. Additionally, two of five underinsured adults surveyed took on credit card debt or used up their savings to pay medical bills and/or or saw a negative impact on their credit rating because of difficulty paying these bills.

Medical debt does not typically carry interest. However, to avoid collections, it may be tempting to paying a hefty or past due medical bill with a credit card. In doing so, the bill immediately goes from no-interest to accruing interest. While hospitals and offices might work out payment plans, it can be overwhelming to figure out how to pay thousands of dollars in medical costs. Having the cash needed available from equity may provide the solution.

According to financial website Nerdwallet, as of 2024, the interest rates on student loan debt are the highest they have been in sixteen years! Coupled with tuition costs that continue to rise, more homeowners are utilizing their home equity to pay off costly student loan debt or to fund education expenses for themselves or their children.

Using home equity to finance education can be a strategic investment in the future, especially if it leads to increased earning potential and avoidance of more costly private education loans.

Finance an investment property:

Using a home equity loan to invest in additional properties can be a lucrative strategy to improve a financial situation. The income generated from collecting rent or potential profit from a flip may provide enough funds to ‘rinse and repeat’ the process and help build up passive income and long-term wealth.

Create a nest egg and protect against cash-flow emergencies:

In an article published last year by CNBC, it cited that even Americans making more than $100,000 a year are living paycheck to paycheck. In fact, more than 60% of Americans are, and that leaves little to no opportunity to save.

Having an emergency fund is fundamental to financial security. However, most Americans cannot afford to pay for a $1,000 emergency expense. Only 44% have enough in their savings to cover the cost without having to use credit cards or getting a loan or borrowing from friends and family.

Tapping into your home equity to establish or strengthen an emergency fund can provide peace of mind and financial security.

Protect retirement funds:

Those needing money and considering borrowing from a 401(k), should consider this: borrowing from a retirement plan while still working means those dollars are no longer invested. This creates a missed opportunity for earning returns that could be greater than the interest rate paid on the equity loan.

Additionally, if an employee borrows from a 401(k) and leaves the employer the 401(k) plan is through, the remaining balance may be considered an early withdrawal if not paid within 60 days after leaving the job. Furthermore, the borrowed money will likely be subject to a 10% early withdrawal penalty. Using a home equity loan instead of borrowing against retirement funds can help protect future money.

Increase employment opportunities:

Investing in yourself pays higher dividends than anything else! Home equity loans can be used to pay for higher education, vocational training, or certification programs. Acquiring new skills and qualifications can lead to promotions and salary increases as well as better job opportunities, potentially increasing your wealth over the long term.

How do you start the process?

Tapping into home equity can be a smart financial move when it is done at the right time and for the right reasons. Whether it is to consolidate debt, create a financial safety net, or invest in the future, proper planning is key.

The first step is to connect with an experienced MiMutual Mortgage Loan Officer who can go over the pros and cons of borrowing against equity and determine which loan option is the right one based on an individual’s financial situation and goals.

Each option has its own benefits and setbacks, and an experienced Loan Officer will strategize the best path forward. If you are looking for a way to unlock your home’s equity, MiMutual Mortgage can help!