10 Reasons To Tap Your Home Equity For Cash

High interest rates. Rising prices. Dwindling savings. Several factors continue to threaten the financial security of many Americans. Borrowing has never been more expensive in the past 20 years, and even worse, loans and credit are harder to obtain. According to Bankrate’s Credit Denial Survey, half (50%) of Americans who applied for a loan or financial product between March 2022 (when the Fed began raising its key benchmark interest rates) and February 2024 were denied.

But with mortgage rates and home prices remaining high, there is a silver lining for homeowners: Rising real estate values ​​have increased the equity, or value of your ownership, in your home. You can borrow against that equity to pay for new expenses or pay off old ones.

Two options for leveraging your equity are a home equity loan and a home equity line of credit (HELOC). Here are 10 reasons to leverage your home equity if you’re a homeowner who needs cash. Each reason has different advantages and disadvantages. We’ll discuss the pros and cons for each case.

What is home equity and why should you use it?

Home equity is the difference between the value of your home and the remaining balance on your mortgage. As you pay off your mortgage and the value of your home increases, so does your equity.

If you’ve just closed a contract to buy a home and need cash, you can usually tap into your home equity right away. However, some lenders require borrowers to wait several months before applying for a mortgage or HELOC. With or without a waiting period, you must meet the lender’s qualification requirements, which include minimum credit score requirements, income verification, and maximum debt-to-income ratio (DTI) requirements. Most importantly, you must have at least 20 percent home equity to qualify, although some lenders will accept 15 percent.

What are the ways to access home equity?

There are a few common ways that most homeowners can access their home equity.

Mortgage

A home equity loan is a type of second mortgage that is paid in a lump sum up front and then made regular monthly payments over the life of the loan, usually at a fixed interest rate.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit, like a credit card, with a variable interest rate that allows you to borrow, pay back and repurpose funds as needed over a set draw period, paying off the balance over the repayment term.

10 reasons to take out a mortgage

While there are no restrictions on how you can use the equity in your home, there are ways to get the most out of your mortgage or HELOC. Here are 10 ways to use your home’s equity, along with their pros and cons.

1. Home renovation

Home improvements are one of the most common reasons homeowners take out a mortgage or HELOC: Not only do they improve the comfort of your home, but renovations also increase the value of your home.

“Home equity is a great option for financing larger projects, like a kitchen remodel, that will increase the value of your home over time,” says Glenn Brunker, president of online lending firm Ally Home. “Often, these investments pay for themselves through increased home values.”

Another reason to consider a home equity loan, or HELOC, for your renovations is that you may be able to deduct the interest you pay on the loan if you itemize deductions on your tax return.

Strong Points

• In essence, you are putting your home’s value to good use and increasing the value of your property.
• If you itemize your tax deductions, you can deduct interest on a mortgage or HELOC up to the limits.
• HELOCs that allow staged withdrawals are ideal for long-term projects, especially those where you pay contractors at set intervals or where the final cost is uncertain.

Cons

• Monthly payments on a home equity loan, or HELOC, combined with your monthly mortgage payment can put a strain on your budget.
• Depending on the scope of your renovations, you may need more money than you can borrow from your own funds.
• If you can’t repay your mortgage or HELOC, the lender could foreclose on your home.

2. Educational costs

A home equity loan or HELOC can help you finance higher or continuing education for yourself, your children, or a significant other. However, this method only makes sense if home equity interest rates are lower than student loan interest rates. This isn’t common, especially with federal loans, but it can happen with private loans.

Consider the type of education you’re financing. For example, those getting a teaching certificate may be able to have their costs covered by a future employer. Also, some public servants are eligible for student loan forgiveness after a certain period of time. In these cases, pledging your home as collateral for a mortgage may not be a good idea.

Strong Points

• It may be a lower interest rate option than a private student loan, a federal parent loan, or a personal loan.
• The HELOC’s phased withdrawal structure is customized for annual or semi-annual tuition payments.
• You may be able to borrow more than you can with a student loan.

Cons

• Repayments begin sooner (if you have a mortgage).
• Interest rates are not as competitive as federal student loans.
• Leveraging home equity is risky: if you default, you could lose your home.
• Students may be able to get financial assistance through other means, such as from future employers or loan forgiveness.

3. Debt consolidation

Americans’ credit card debt is skyrocketing. According to Bankrate’s Credit Card Debt Survey, 50% of credit card holders currently carry a monthly balance, the highest level in four years. With an average interest rate of 22.63%, paying off that debt can be difficult, not to mention expensive.

A HELOC, or home equity loan, can be used to pay off a plastic loan alongside other higher interest rate loans. “This is another very popular use of home equity, as it allows you to consolidate debt at a much lower interest rate over a longer period of time, often significantly reducing your monthly outgoings,” says Matt Hackett, operations manager at mortgage lender Equity Now.

According to Bankrate’s Home Equity Insights Survey, 30% of U.S. homeowners believe debt consolidation is a good enough reason to leverage their home equity.

Strong Points

• You can save money on interest and lower your monthly payments.
• Eliminating credit card debt will improve your credit score.

Cons

• It turns unsecured debt, like credit cards, into secured debt secured by your home. If you default on your payments on an equity loan or HELOC, you could lose your home to foreclosure.
• If you aren’t breaking the financial habits that got you into debt in the first place or creating a repayment plan, you’re simply replacing one form of debt with another.

4. Emergency Expenses

While most financial experts agree that you should have an emergency fund that can cover three to six months of living expenses, for many Americans, that’s not the reality. According to Bankrate’s Emergency Savings Survey, 56% of Americans have three months or less of living expenses saved up, or no emergency savings at all. If you find yourself in an expensive situation, like a costly medical bill or unexpected home repairs, taking out a home equity loan, or HELOC, is one way to get through a cash crunch.

However, this is only a viable option if you have a plan for paying down your debt. While it may be reassuring to know that you can tap into your home equity in an emergency, it’s also financially wise to set up an emergency fund and start building up. Plus, the application process for a HELOC or home equity loan is lengthy (though it’s sped up recently; some online lenders, like Better, offer approval decisions within a day). If you have a true emergency and need cash right away, you should take out a loan.

Strong Points

• If you find yourself in an emergency and have no other way to access cash, a mortgage or HELOC could be the solution.

Cons

• If you don’t already have a HELOC or home equity loan, you’ll need to complete the application process first, so these loans won’t help you in a time-crunching emergency.
• Ownership declines and the value of your primary asset, your home, is diluted.

5. Weddings

According to planning site The Knot, the average cost of a wedding in 2023 will be $35,000, up $5,000 from 2022. For some couples, it may make sense to take out a home equity line of credit, or HELOC, to cover this expense rather than a wedding loan, a type of personal loan. That’s because interest rates on personal loans are typically higher than interest rates on home equity lines of credit, or HELOCs.

But the big downside is that you’ll have to sacrifice your home for discretionary spending, which can be risky if you don’t have a solid plan for paying off your mortgage, and it will end up costing you more in the end as interest is added to expenses that weren’t interest-bearing in the first place.

If you choose this method, be sure not to borrow more than you need. If you’re unsure of the total amount that will be involved on your big day, a HELOC is a better option.

Strong Points

• It will likely have a lower interest rate than a personal loan or credit card.
• You may be able to access a larger amount of money than with other loans.

Cons

• Essentially putting your home at risk for a big party is questionable behavior.
• Loan interest can make your wedding much more expensive than you expected, and you could be paying for it for decades after you’re married.
• When a loan is used in this way, the interest is not tax deductible.

6. Business Expenses

Some business owners use the equity in their homes to start and grow their companies. If you need capital, you may be able to save on interest by leveraging the equity in your home instead of taking out a business loan. But do the math before you decide to do it. There’s no guaranteed return on your investment, and you’ll be putting your home at risk.

Strong Points

• With a mortgage, you may be able to borrow money at a lower interest rate than with a small business loan.
• Especially if you are just starting out, you may find it easier to get funding through a mortgage rather than a business-related loan.

Cons

• If your business fails, you’ll still have to repay the money you borrowed, even if you have no income. If you can’t repay, you could face foreclosure.

7. Investment Opportunities

It is also possible to invest your home equity in the stock market or purchase rental properties, but both propositions carry risks and require due diligence and consideration. Well-qualified borrowers may also be able to take out a home equity loan against an investment property they own.

But consider the cost of a home equity loan. “When interest rates are 9 percent, 10 percent or higher, it’s no longer low-cost debt,” says Greg McBride, CFA, chief financial analyst at Bankrate. “With interest rates that high, you have a higher hurdle to overcome to see a positive return on your investment.”

Strong Points

• Investing in the stock market and real estate will put you on the path to building wealth, and the earlier you start, the better.
• Leveraging and investing your assets will increase your rate of return.

Cons

• You may not even be able to make enough money to cover the loan interest you pay.
• Even if the value of your investment goes down, you still owe money.
• With some exceptions, such as if you are buying an adjoining property or land, you cannot take advantage of the tax deduction on mortgage interest.

8. Retirement income

If you don’t have enough savings for retirement, tapping into the equity in your home can help you supplement your income and better manage your expenses. These funds can be used to pay off bills, emergency expenses, and even home improvements that will keep you comfortable as you age. Big caveat: This strategy depends on your ability to pay off the loan or HELOC. If you’re not yet receiving Social Security, you may be able to pay off the HELOC funds with your benefits later. However, if you’re fully retired and struggling to make ends meet, you may not have the means to pay off the debt, even if you have a HELOC and don’t need to pay it off right away.

There are other obstacles to this strategy: If you’re still paying off your first mortgage, tapping into your equity could increase your expenses and drag you out of debt for longer. And if you’re on a reduced income after retirement, it might even be difficult to get an equity loan.

Strong Points

• If you need to boost your income in retirement, borrowing from your assets might make more sense than selling your investments.

Cons

• You’ll need to think carefully about how you’ll repay the loan before and after you leave your job. Mortgage debt doesn’t disappear when you die, and your heirs will have to negotiate with the lender if they want to keep the home.
• If you have a low income in retirement, it may be harder to qualify for a mortgage.

If you need retirement income, a reverse mortgage may be a better option than a home equity loan or HELOC. With a reverse mortgage, the lender makes a lump sum or monthly payments. How much you get depends on the value of your home. The loan balance (and interest) is due when you move, sell your home, or die. Most reverse mortgages contain a “non-recourse” clause, which states that you (or your estate) can’t owe more than the value of the home when the loan comes due (so if the home depreciates and becomes less than the loan balance, no one is on the hook for the difference).

Pros: There are no monthly payments required as long as you live in your home, and there are no income or credit score requirements, so you can qualify even if you’re struggling financially. But to get a reverse mortgage, you usually need to be over 62 and have significant equity in your home, meaning you’ve paid off significantly, if not all, of your primary mortgage.

9. Vacation Fund

Travel can be expensive, but tapping into your home equity can help you cover the costs without racking up credit card debt. But even the best vacations don’t last forever, and home equity debt can linger for decades, so make your decision carefully. Is it worth risking your home to travel?

Strong Points

• Mortgages usually have lower interest rates than credit cards, so they can save you money.

Cons

• Putting money into a home to pay for a trip that will only last a few days is a very risky move, as you could end up paying for it for years after the trip is over, ultimately racking up interest.

10. Other high-value items

While it’s possible to use your home equity for a larger purchase, the benefits are often not significant. A home equity loan has a much longer repayment term than, say, a car loan, so your monthly payments will be lower. But it also means you’ll pay much more in interest over time. Cars are also depreciating assets, so by the time you’ve paid off your home equity loan, your car will be worth significantly less than you paid it for.

Strong Points

• You can also get financing for larger purchases like a car.

Cons

• It’s not worth using the equity in your home to pay for expenses that don’t provide a solid return. Take the example of buying a car: you’re putting your home at risk for an asset that may be worth less than you paid for it by the time you pay off the loan.

How do I calculate how much home equity I can borrow?

With a home equity loan, most lenders will let you borrow up to 80 to 85 percent of your total loan-to-value ratio (CLTV), which is called “total” because it takes into account both your current mortgage and any additional loans you may take out in the future.

CLTV is calculated by dividing the total amount of home-related debt by the total value of your home. For example, if your home is worth $450,000, your outstanding mortgage amount is $200,000, and you want to borrow $50,000 on a home equity loan, here’s how to calculate your CLTV:

Using a mortgage calculator can help you figure out how much you can borrow.

FAQs on using your home equity