How to Think Strategically About the Equity You’ve Built
For many homeowners, their house is more than the place they live – it may also be one of their largest financial assets.
If you’ve owned your home for several years, you may have built substantial equity through a combination of paying down your mortgage and increasing home values.
But here’s the question homeowners don’t always ask: What should I actually do with that equity?
Home equity isn’t free money, and accessing it isn’t always the right move. But, used thoughtfully, it can be a powerful financial tool.
What Is Home Equity?
Simply put, home equity is the difference between what your home is worth and what you owe against it.
If your home is worth $500,000 and you owe $250,000, you have approximately $250,000 in equity. That doesn’t necessarily mean you can or should borrow all of it. But you have an asset worth considering as part of your larger financial picture. Your home equity is a tool.
When Does Using Equity Make Sense?
- Home Improvement
A new roof, addition, kitchen renovation, energy-efficiency project or accessibility improvement may allow you to stay in a home and neighborhood you already love while protecting or improving its long-term value.
- Debt Consolidation
If you’re carrying significant higher-interest debt, accessing home equity may offer a lower-cost alternative. But this requires careful analysis: consolidating debt doesn’t eliminate it, and you’re securing that debt against your home.
- Major Life Expenses
Equity can also help fund expenses like education, purchasing another property or other long-term financial goals. These decisions should ideally involve your financial planner, accountant or other trusted advisors as appropriate.
Not All Equity Options Are the Same
This is where homeowners can get overwhelmed with these choices:
- Cash-Out Refinance
Replaces your existing mortgage with a new, larger mortgage.
- Home Equity Loan
Typically provides a lump sum with a fixed payment.
- Home Equity Line of Credit (HELOC)
Provides a revolving line you can draw from as needed, generally with an adjustable rate.
- Renovation Financing
Another option when the money is being used to improve your home.
The best solution isn’t simply what has the lowest advertised rate. Your existing mortgage rate, loan balance, amount of equity, monthly budget, credit profile and plans for the property all matter.
Start With the Strategy, Not the Loan
Before borrowing against your home, start with a different question: What am I trying to accomplish?
Then compare the options and the long-term cost of each.
At Applied Mortgage, we offer complimentary homeowner mortgage and equity reviews. We’ll review your existing mortgage, estimate your available equity and walk through the financing options that make sense for your goals.
Sometimes the smartest move is accessing your equity. Sometimes it’s leaving it exactly where it is. Either way, knowing your options is a great place to start.
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