{"id":3927,"date":"2023-04-18T10:24:44","date_gmt":"2023-04-18T14:24:44","guid":{"rendered":"https:\/\/www.khov.com\/blog\/?p=3927"},"modified":"2025-01-15T15:55:48","modified_gmt":"2025-01-15T15:55:48","slug":"what-is-home-equity-and-how-do-you-use-it","status":"publish","type":"post","link":"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/","title":{"rendered":"What is Home Equity and How Do You Use It?"},"content":{"rendered":"\n<p>If you\u2019re interested in homeownership, \u201chome equity\u201d might be one of those home buying terms that you come across a lot without being entirely sure what it means. <\/p>\n\n\n<style>.kb-row-layout-id3927_56541f-20 > .kt-row-column-wrap{align-content:start;}:where(.kb-row-layout-id3927_56541f-20 > .kt-row-column-wrap) > .wp-block-kadence-column{justify-content:start;}.kb-row-layout-id3927_56541f-20 > .kt-row-column-wrap{column-gap:var(--global-kb-gap-md, 2rem);row-gap:var(--global-kb-gap-md, 2rem);grid-template-columns:minmax(0, calc(45% - ((var(--global-kb-gap-md, 2rem) * 1 )\/2)))minmax(0, calc(55% - ((var(--global-kb-gap-md, 2rem) * 1 )\/2)));}.kb-row-layout-id3927_56541f-20 > .kt-row-layout-overlay{opacity:0.30;}@media all and (max-width: 1024px){.kb-row-layout-id3927_56541f-20 > .kt-row-column-wrap{grid-template-columns:repeat(2, minmax(0, 1fr));}}@media all and (max-width: 767px){.kb-row-layout-id3927_56541f-20 > .kt-row-column-wrap{grid-template-columns:minmax(0, 1fr);}}<\/style><div class=\"kb-row-layout-wrap kb-row-layout-id3927_56541f-20 alignnone wp-block-kadence-rowlayout\"><div class=\"kt-row-column-wrap kt-has-2-columns kt-row-layout-equal kt-tab-layout-inherit kt-mobile-layout-row kt-row-valign-top\">\n<style>.kadence-column3927_53b39a-1e > .kt-inside-inner-col,.kadence-column3927_53b39a-1e > .kt-inside-inner-col:before{border-top-left-radius:0px;border-top-right-radius:0px;border-bottom-right-radius:0px;border-bottom-left-radius:0px;}.kadence-column3927_53b39a-1e > .kt-inside-inner-col{column-gap:var(--global-kb-gap-sm, 1rem);}.kadence-column3927_53b39a-1e > .kt-inside-inner-col{flex-direction:column;}.kadence-column3927_53b39a-1e > .kt-inside-inner-col > .aligncenter{width:100%;}.kadence-column3927_53b39a-1e > .kt-inside-inner-col:before{opacity:0.3;}.kadence-column3927_53b39a-1e{position:relative;}@media all and (max-width: 1024px){.kadence-column3927_53b39a-1e > .kt-inside-inner-col{flex-direction:column;justify-content:center;}}@media all and (max-width: 767px){.kadence-column3927_53b39a-1e > .kt-inside-inner-col{flex-direction:column;justify-content:center;}}<\/style>\n<div class=\"wp-block-kadence-column kadence-column3927_53b39a-1e\"><div class=\"kt-inside-inner-col\"><div class=\"wp-block-ub-table-of-contents-block ub_table-of-contents\" id=\"ub_table-of-contents-d627eb07-5155-47c4-aa3c-67263d632c3f\" data-linktodivider=\"false\" data-showtext=\"show\" data-hidetext=\"hide\" data-scrolltype=\"auto\" data-enablesmoothscroll=\"false\" data-initiallyhideonmobile=\"false\" data-initiallyshow=\"true\"><div class=\"ub_table-of-contents-header-container\" style=\"\">\n\t\t\t<div class=\"ub_table-of-contents-header\" style=\"text-align: left; \">\n\t\t\t\t<div class=\"ub_table-of-contents-title\"><\/div>\n\t\t\t\t\n\t\t\t<\/div>\n\t\t<\/div><div class=\"ub_table-of-contents-extra-container\" style=\"\">\n\t\t\t<div class=\"ub_table-of-contents-container ub_table-of-contents-1-column \">\n\t\t\t\t<ol style=\"\"><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#0-what-is-home-equity-\" style=\"\">What Is Home Equity?<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#1-how-does-home-equity-work-\" style=\"\">How Does Home Equity Work?<\/a><ol><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#2-how-to-calculate-home-equity-\" style=\"\">How to Calculate Home Equity<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#3-can-home-equity-change-\" style=\"\">Can Home Equity Change?<\/a><\/li><\/ol><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#6-what-is-home-equity-used-for-\" style=\"\">What is Home Equity Used For?<\/a><ol><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#7-canceling-private-mortgage-insurance-pmi-\" style=\"\">Canceling Private Mortgage Insurance (PMI)<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#8-home-improvements-\" style=\"\">Home Improvements<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#9-tuition-\" style=\"\">Tuition<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#10-consolidate-high-interest-debts-\" style=\"\">Consolidate High Interest Debts<\/a><\/li><\/ol><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#11-how-to-borrow-against-home-equity-\" style=\"\">How to Borrow Against Home Equity<\/a><ol><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#12-a-home-equity-loan-\" style=\"\">Home Equity Loan<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#13-b-heloc-\" style=\"\">HELOC<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#14-c-fixed-rate-heloc-\" style=\"\">Fixed-Rate HELOC<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#15-d-reverse-mortgage-\" style=\"\">Reverse Mortgage<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#16-e-cash-out-refinance-\" style=\"\">Cash-Out Refinance<\/a><\/li><\/ol><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#17-6-5-tips-for-building-home-equity-in-a-home-\" style=\"\">5 Tips for Building Home Equity in a Home<\/a><ol><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#18-1-a-larger-down-payment\" style=\"\">1. A Larger Down Payment<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#19-2-consistent-mortgage-payments\" style=\"\">2. Consistent Mortgage Payments<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#20-3-refinance-to-a-shorter-term-loan\" style=\"\">3. Refinance to a Shorter-Term Loan:<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#21-4-look-into-home-improvements-that-could-improve-your-home%E2%80%99s-value-\" style=\"\">4. Look Into Home Improvements That Could Improve Your Home\u2019s Value<\/a><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#22-5-the-last-one-is-maybe-the-easiest-of-all\" style=\"\">5. The Last One Is Maybe The Easiest of All:<\/a><\/li><\/ol><\/li><li style=\"\"><a href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/#23-building-home-equity-is-a-good-thing\" style=\"\">Building Home Equity is a Good Thing<\/a><\/li><\/ol>\n\t\t\t<\/div>\n\t\t<\/div><\/div><\/div><\/div>\n\n\n<style>.kadence-column3927_deb7a8-43 > .kt-inside-inner-col,.kadence-column3927_deb7a8-43 > .kt-inside-inner-col:before{border-top-left-radius:0px;border-top-right-radius:0px;border-bottom-right-radius:0px;border-bottom-left-radius:0px;}.kadence-column3927_deb7a8-43 > .kt-inside-inner-col{column-gap:var(--global-kb-gap-sm, 1rem);}.kadence-column3927_deb7a8-43 > .kt-inside-inner-col{flex-direction:column;}.kadence-column3927_deb7a8-43 > .kt-inside-inner-col > .aligncenter{width:100%;}.kadence-column3927_deb7a8-43 > .kt-inside-inner-col:before{opacity:0.3;}.kadence-column3927_deb7a8-43{position:relative;}@media all and (max-width: 1024px){.kadence-column3927_deb7a8-43 > .kt-inside-inner-col{flex-direction:column;justify-content:center;}}@media all and (max-width: 767px){.kadence-column3927_deb7a8-43 > .kt-inside-inner-col{flex-direction:column;justify-content:center;}}<\/style>\n<div class=\"wp-block-kadence-column kadence-column3927_deb7a8-43\"><div class=\"kt-inside-inner-col\">\n<p><\/p>\n\n\n\n<p>We get it \u2013 new homeownership can be a dizzying topic, and there\u2019s lots to keep track of.&nbsp;<\/p>\n\n\n\n<p>But home equity is one of the most important concepts to grasp when <a href=\"https:\/\/www.khov.com\/blog\/new-home-buying-process\/\">buying a new home<\/a>, and one of the fundamental pluses of home ownership: Unlike a home you rent, a home you buy can actually pay you back.&nbsp; <\/p>\n\n\n\n<p>How is that? Well, the reason for that is home equity, and we\u2019re here to explain what it&#8217;s all about!&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"0-what-is-home-equity-\"><strong>What Is Home Equity?<\/strong><\/h2>\n\n\n\n<p>The basic definition of home equity is simple: Home equity is the value of your share in a home.<\/p>\n\n\n\n<p><strong>Okay, so what\u2019s your share in a home?<\/strong><\/p>\n\n\n\n<p>That\u2019s simple, too. Unless you bought your home with a big bag of cash, you\u2019ve probably taken out a <a href=\"https:\/\/www.khov.com\/blog\/types-of-home-loans\/\" target=\"_blank\" rel=\"noreferrer noopener\">home loan<\/a> which means that you own some of the home, and your lender owns some. <\/p>\n\n\n\n<p>As you pay off the mortgage, you gradually own more and more, while your lender gradually owes less and less.&nbsp; <\/p>\n<\/div><\/div>\n\n<\/div><\/div>\n\n\n<p>If you think of your home as a pie, your slice of the pie gradually gets bigger, while your lender\u2019s piece gets smaller. Home equity is the value of your piece of pie.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"1-how-does-home-equity-work-\"><strong>How Does Home Equity Work?<\/strong><\/h2>\n\n\n\n<p>Home equity can be expressed as either a percentage or a cash value.&nbsp;<\/p>\n\n\n\n<p>To return to the bag of cash example, anyone who buys their home outright immediately owns the whole home, so they have 100% equity. If that home has a market value of $400,000, you could also say they have $400,000 equity. Both numbers refer to the same piece of pie.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"2-how-to-calculate-home-equity-\"><strong>How to Calculate Home Equity<\/strong><\/h3>\n\n\n\n<p>Of course, most people don\u2019t buy their homes outright.<\/p>\n\n\n\n<p>Say you buy that same $400,000 home by putting down a 10% down payment, and taking out a home loan for the remaining $360,000. As soon as you buy the home, you immediately have 10% (or $40,000) equity in your home, and that number goes up as you make mortgage payments.<\/p>\n\n\n\n<p>At any point in time, you can always calculate the cash value of your equity by taking your home\u2019s estimated current market value, and subtracting the amount you still owe on your mortgage:&nbsp;<\/p>\n\n\n\n<p><strong>Home\u2019s market value \u2013 the amount you still owe on the home = your equity in the home.<\/strong><\/p>\n\n\n\n<p>The formula above will give you the cash value of your current home equity. If you want to know your equity in the form of a percentage, simply divide that cash value number by your home\u2019s current market value.<\/p>\n\n\n\n<p>Let\u2019s look at an example. After a few years of regular mortgage payments, you now owe less money to your lender: Excluding interest, you\u2019ve paid off $80,000 of your home, on top of your original $40,000 down payment. You\u2019ve now paid off a total of $120,000, and you still owe $280,000.<\/p>\n\n\n\n<p><em>If<\/em> your home\u2019s market value has held stable at $400,000, that means:<\/p>\n\n\n\n<p>$400,000 market value &#8211; $280,000 still owed = <strong>$120,000 in home equity<\/strong><\/p>\n\n\n\n<p>If you want the equity as a percentage, divide that home equity cash value by the current market value of your home:<\/p>\n\n\n\n<p>$120,000 in equity \u00f7 $400,000 market value =&nbsp; <strong>30% equity.<\/strong><\/p>\n\n\n\n<p>So if someone were to cut up that home pie today, your slice would be 30% of the pie, and it would be worth $120,000 on the pie market. Your lender\u2019s slice, now 70% of the pie, would be priced at $280,000. (It\u2019s an expensive pie.)&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"3-can-home-equity-change-\"><strong>Can Home Equity Change?<\/strong><\/h3>\n\n\n\n<p>Home equity certainly can, and does, change.<\/p>\n\n\n\n<p>As we just saw, you\u2019ll increase your home equity just by making your monthly mortgage payments, because you\u2019re owning more and more of the home. But your home equity can also change (for better or worse) if the market value of your home changes.<\/p>\n\n\n\n<p>Let\u2019s look at two examples.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"4-i-home-equity-increase-\">&nbsp;<strong>&nbsp;&nbsp;i.&nbsp; Home Equity Increase<\/strong><\/h4>\n\n\n\n<p>We\u2019ll return to our $400,000 home. You\u2019ve paid off $80,000 of the principal with monthly payments over the last few years, plus your original $40,000 down payment, so that you\u2019ve paid $120,000. You still owe $280,000.<\/p>\n\n\n\n<p>You can get a rough estimate of your home\u2019s value by looking around at current prices of similar homes in your area, and find that \u2013 due to market conditions and other factors \u2013 your home\u2019s value has probably gone up (though if you want to actually use your home equity, you\u2019ll need to get a professional appraisal). You estimate that your home is now worth about $440,000.<\/p>\n\n\n\n<p>If you do the same calculation we did above, you\u2019ll get your estimated equity:<\/p>\n\n\n\n<p>$440,000 market value &#8211; $280,000 still owed = <strong>$160,000 in home equity.&nbsp;<\/strong><\/p>\n\n\n\n<p>$160,000 home equity \u00f7 $440,000 market valu<strong>e = 36% equity.<\/strong><\/p>\n\n\n\n<p>Because your home has become more valuable, your stake in your home is now worth $160,000 instead of $120,000. You effectively earned $40,000 without having to do anything. You also have a higher equity percentage \u2013 36% \u2013 instead of the 30% you\u2019d have had if the home price hadn\u2019t changed.<\/p>\n\n\n\n<p>The key is to remember that the market value of your home could change, but the amount of your original home loan will not: If you took out a $360,000 mortgage, the principal you have to pay back will stay $360,000, even if your home is eventually worth $4 million instead of $400,000. <\/p>\n\n\n\n<p>This makes home ownership a very smart and easy way to build wealth. As to what you can do with that increased value, we\u2019ll get into it more below. But first\u2026.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"5-ii-home-equity-decrease-\">&nbsp;&nbsp;ii.&nbsp; <strong>Home Equity Decrease<\/strong><\/h4>\n\n\n\n<p>Unfortunately, the same thing can happen in reverse.<\/p>\n\n\n\n<p>We\u2019ll use the same example, in which you\u2019ve bought a $400,000 home, paid off $120,000, and owe $280,000 on your mortgage.&nbsp; But this time, the home\u2019s value has decreased, and it\u2019s now worth $360,000.<\/p>\n\n\n\n<p>If we do the same calculation, we\u2019ll find:<\/p>\n\n\n\n<p>$360,000 market value &#8211; $280,000 still owed =<strong> $80,000 home equity<\/strong><\/p>\n\n\n\n<p>$80,000 home equity \u00f7 $360,000 market value<strong> = 22% equity.<\/strong><\/p>\n\n\n\n<p>Even though you\u2019ve paid $120,000 towards owning your home, your share of that home is currently worth $40,000 less than you paid for it. Your equity percentage has also gone down: You own 22% of the home, instead of the 30% you\u2019d have owned if the home price had remained stable.<\/p>\n\n\n\n<p>Of course, any home equity calculation is essentially a snapshot in time. If your home price has dropped for now, it can always go back up. This is just one reason why it\u2019s important to be as flexible as possible with your timing if you plan to sell your home, or to use your home equity, so that your share is worth as much as possible.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"6-what-is-home-equity-used-for-\"><strong>What is Home Equity Used For?<\/strong><\/h2>\n\n\n\n<p>We\u2019ll get more into the weeds of home equity borrowing below, but for now let\u2019s just say that your home equity can help you get a low-interest loan \u2013 and that the more equity you have, the more you can borrow.<\/p>\n\n\n\n<p>There\u2019s a wide range of ways to use home equity.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"7-canceling-private-mortgage-insurance-pmi-\"><strong>Canceling Private Mortgage Insurance (PMI)<\/strong><\/h3>\n\n\n\n<p>If you took out a conventional loan and put down a down payment of less than 20%, your lender likely bundled <a href=\"https:\/\/www.khov.com\/blog\/private-mortgage-insurance-what-it-is-and-when-you-need-it\/\" target=\"_blank\" rel=\"noreferrer noopener\">private mortgage insurance<\/a> (PMI) payments into your monthly mortgage payments.&nbsp; PMI ranges from 0.3% and 1.5% of the loan value, which may not sound like much, but it can add up: A homeowner with a $360,000 mortgage could <a href=\"https:\/\/www.bankrate.com\/mortgages\/basics-of-private-mortgage-insurance-pmi\/#types\" target=\"_blank\" rel=\"noreferrer noopener nofollow\">expect to pay<\/a> about $100-$250 per month in PMI, or $1,200 &#8211; $3,000 per year.<\/p>\n\n\n\n<p>The good news is, as soon as you reach 20% equity in your home, you no longer have to pay PMI. Your lender will cancel the PMI requirement automatically once you reach 22% equity in accordance with your regular payment schedule&nbsp; \u2013 but you can request for it to be canceled as soon as you hit 20%.&nbsp;<\/p>\n\n\n\n<p>If you believe you\u2019ve hit the 20% target amount ahead of schedule\u2013 say, if the sales prices of homes in your neighborhood are going up and you believe your home is worth more than it originally was \u2013 you can tell your lender. They\u2019ll want the home professionally appraised, and if it\u2019s determined that you have indeed reached 20% equity, you\u2019ll no longer have to pay PMI.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"8-home-improvements-\"><strong>Home Improvements<\/strong><\/h3>\n\n\n\n<p>Another common use of home equity is to make home improvements. Not only do home equity loans typically offer a&nbsp; lower interest rate than credit card or personal loans (more on that below) \u2013 the interest on those loans is often tax-deductible, if you\u2019ve used the funds to improve the value of your home. Which can, in turn, also cause your home to be worth more, increasing your equity \u2013 making this a very financially savvy move.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"9-tuition-\"><strong>Tuition<\/strong><\/h3>\n\n\n\n<p>College tuition payments and expenses are another common use for home equity, as the interest rates are typically less than those on student loans, or personal loans. It can also be a good way to consolidate student loan debt into one payment.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"10-consolidate-high-interest-debts-\"><strong>Consolidate High Interest Debts<\/strong><\/h3>\n\n\n\n<p>The same thing goes for pretty much any type of debt. With that all-important low interest rate, home equity loans are a smart way to consolidate debt like credit cards, car payments, and personal loans into one monthly payment; by taking out a low-interest home equity loan to pay off all those other debts, you\u2019ll just have the one monthly payment on your home equity loan, instead of a bunch of separate ones. It\u2019s not only a convenient way to organize your finances, but can also save you a bundle in lower interest payments.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"11-how-to-borrow-against-home-equity-\"><strong>How to Borrow Against Home Equity<\/strong><\/h2>\n\n\n\n<p>If you want to tap into your home equity, you\u2019ll need to get your home professionally appraised. As we mentioned earlier, you can get a rough idea of its current market value by checking the sales prices of similarly-sized homes in your neighborhood, but if you want to take out money, it will have to be based on more than an estimate. This is one reason why borrowing against home equity can take longer than other loan options.&nbsp;<\/p>\n\n\n\n<p>Another key component of home equity borrowing, as we\u2019ve mentioned, is the comparatively low interest rates; you might find yourself paying 4%-6% interest on a home equity loan, as opposed to 15% on a personal interest loan and close to 20% on a credit card.&nbsp;<\/p>\n\n\n\n<p>That said, it\u2019s crucial to remember the reason for those low interest rates: unlike unsecured debt like credit cards or personal loan payments, borrowing money based on the value of your home means that you\u2019re putting your home up as collateral. Which means that if you\u2019re unable to make payments, your lender could seize your home. This is one reason why borrowing against your home equity \u2013 just like any other kind of borrowing \u2013 should be carefully considered.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"12-a-home-equity-loan-\"><strong>a.&nbsp; <\/strong><strong><\/strong><strong>Home Equity Loan<\/strong><\/h3>\n\n\n\n<p>Home equity loans, also referred to as second mortgages, are in many ways like any other type of loan: You apply for a set amount, which you agree to pay back on a predetermined timeline, with a fixed interest rate and fixed payment amounts. Once you agree to the loan, you receive all the funds at once in a lump sum.<\/p>\n\n\n\n<p>The amount of equity you have in your home directly affects how much you\u2019re able to borrow. First, lenders usually require you to have 15-20% equity in your home to qualify for a home equity loan of any amount. Next, the amount of equity you have determines how much you\u2019re eligible to borrow, when determining the combined loan-to-value (CLTV) ratio \u2013 which essentially means the maximum amount of money the lender might be willing to offer you.<\/p>\n\n\n\n<p>Generally speaking, a lender could offer you as much as 80%-90% of your current home equity \u2013 so if you have higher equity, you may be eligible for a bigger loan. But it\u2019s important to remember that this figure is a ceiling: a lender may well offer less than that, depending on factors like your income and credit score. These will also play into what kind of rate you\u2019re offered.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"13-b-heloc-\"><strong>b.&nbsp; <\/strong><strong><\/strong><strong>HELOC<\/strong><\/h3>\n\n\n\n<p>Almost everything we\u2019ve said about home equity loans also applies to <a href=\"https:\/\/consumer.ftc.gov\/articles\/home-equity-loans-and-home-equity-lines-credit\" target=\"_blank\" rel=\"noreferrer noopener nofollow\">home equity lines of credit (HELOC)<\/a>. The key difference is the way the funds are disbursed. Whereas a home equity loan will provide you with a lump sum all at once, HELOCs function more like a credit card, where you have a maximum amount that you could theoretically borrow, but you only take out as much as you need at any given time, and your monthly bill depends on how much you\u2019ve taken out.&nbsp;<\/p>\n\n\n\n<p>But unlike a credit card, though, which requires you to start repaying your balance almost immediately, HELOCs can have \u201cdraw periods\u201d of up to 10 years, during which you only have to make interest payments on what you\u2019ve borrowed, and don\u2019t have to make larger payments on the principal yet. This could save you a lot of money in the short term, but you\u2019ll need to keep in mind that you have higher payments waiting for you down the road \u2013 and the more you take out (and the less you pay back), the higher they\u2019ll be.&nbsp;<\/p>\n\n\n\n<p>Interest rates for HELOCs are typically variable-rate, and can change as often as month-to-month, so that your payment amount fluctuates with the market. This brings all the same risks as an adjustable-rate mortgage \u2013 your interest rate could fall, or it could rise \u2013 so this option is best for someone comfortable with a certain amount of risk.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"14-c-fixed-rate-heloc-\"><strong>c. &nbsp; <\/strong><strong><\/strong><strong>Fixed-Rate HELOC<\/strong><\/h3>\n\n\n\n<p>While most HELOCs are automatically variable-rate, some lenders will offer a fixed-rate option. This is exactly what it sounds like: Rather than an interest rate that could change repeatedly, a fixed-rate HELOC offers you fixed monthly payments. If you prefer to avoid uncertainty, a fixed-rate HELOC could be for you. They often have a longer payoff period than variable rates. Deciding on which type of HELOC you want is basically making the same decision you made on a fixed-rate or adjustable-rate mortgage.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"15-d-reverse-mortgage-\"><strong>d.&nbsp; <\/strong><strong><\/strong><strong>Reverse Mortgage<\/strong><\/h3>\n\n\n\n<p>A reverse mortgage is typically for homeowners 62 and older, who\u2019ve already paid off their mortgage and want to keep living in their home as their primary residence. In this model, they receive regular payments <em>from<\/em> their home equity rather than the reverse.&nbsp;<\/p>\n\n\n\n<p>Say a 65-year-old homeowner has paid off their mortgage, and therefore has 100% equity in a home worth $500,000 (or in other words, they have $500,000 equity). A reverse mortgage allows this homeowner to turn their home equity into regular cash payments, almost like a paycheck \u2013 though it\u2019s key to remember that this is still money being borrowed, which will need to be paid back. If you wanted to put $500,000 directly into your bank account, you\u2019d need to sell your home, hope for a good price, and find a new place to live.&nbsp;<\/p>\n\n\n\n<p>There are no fees associated with reverse mortgages, though you will still be responsible for homeowner\u2019s insurance and property taxes. Reverse mortgages also don\u2019t require any payments until the homeowner moves, sells, or passes away (in which case the homeowner\u2019s co-borrower, or heirs, will have to pay back the amount the homeowner borrowed).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"16-e-cash-out-refinance-\"><strong>e.&nbsp; <\/strong><strong><\/strong><strong>Cash-Out Refinance<\/strong><\/h3>\n\n\n\n<p>A cash-out refinance is something in between a home equity loan and a reverse mortgage payment. If you still want to live in your home while tapping into your equity&nbsp; \u2013 and if you want to start paying it back right away \u2013 a cash-out refinance could be for you.&nbsp;<\/p>\n\n\n\n<p>We return to our old friend, the $400,000 home. Now some more time has passed, and you\u2019ve paid off $120,000 of the home, plus your original $40,000 down payment. You now owe $140,000 on your original mortgage. Your home\u2019s value has also gone up, from $400,000 to $480,000.<\/p>\n\n\n\n<p>Even though you now \u201conly\u201d owe $140,000, you can take out a new mortgage for the total amount your home is now worth \u2013 so you could take out a new mortgage of $480,000, put aside $140,000 to pay off your first mortgage, and keep the remaining $340,000 for whatever you want. This can be an excellent way to meet other financial goals, like student loan payments, home renovations, or paying off high-interest debt, but how you spend it is up to you. Better yet, the money you cash out is also tax-free.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"17-6-5-tips-for-building-home-equity-in-a-home-\"><strong>6.&nbsp; 5 Tips for Building Home Equity in a Home<\/strong><\/h2>\n\n\n\n<p>This might all sound great \u2013 but how do you build up home equity? There are lots of ways to boost your home equity, but here are a few of the top methods.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"18-1-a-larger-down-payment\">1. A Larger Down Payment<\/h3>\n\n\n\n<p>This one might seem a little obvious \u2013 but put down as large a down payment as possible when you buy your home. The larger your down payment, the higher percentage of the home you\u2019ll own as soon as you close on it, so you have a higher floor to work from.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"19-2-consistent-mortgage-payments\">2. Consistent Mortgage Payments<\/h3>\n\n\n\n<p>Here\u2019s another easy one \u2013 make consistent, on-time mortgage payments, for as much as you can comfortably afford (ideally higher than your minimum required payment). The more you pay every month, the more of your home you\u2019ll own, and the sooner it will be paid off.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"20-3-refinance-to-a-shorter-term-loan\">3. Refinance to a Shorter-Term Loan:<\/h3>\n\n\n\n<p> Again, if you can afford it, consider speeding up the mortgage payment process by refinancing to a shorter loan term. You\u2019ll not only pay the loan off sooner \u2013 you may be offered a better interest rate, and could save money by avoiding interest payments that would have accrued with a longer loan.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"21-4-look-into-home-improvements-that-could-improve-your-home%E2%80%99s-value-\">4. Look Into Home Improvements That Could Improve Your Home\u2019s Value <\/h3>\n\n\n\n<p>Like remodeling the kitchen or bathroom, replacing exterior siding, improving the home\u2019s energy efficiency, or replacing the garage door. Keep in mind that home renovations don\u2019t automatically add value to your home, so you\u2019ll need to research which ones will pay (though of course, any renovations can still be worth it for you personally \u2013 after all, it\u2019s your home!).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"22-5-the-last-one-is-maybe-the-easiest-of-all\">5. The Last One Is Maybe The Easiest of All:<\/h3>\n\n\n\n<p> Just stay put. While you can sell your home at any time, the longer you live in your home, the more chance you\u2019ll have of seeing its market value increase, along with your equity.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"23-building-home-equity-is-a-good-thing\">Building Home Equity is a Good Thing<\/h2>\n\n\n\n<p>With any luck, the idea of home equity is making a bit more sense at this point. It might also be more clear why renting is in some ways equivalent to throwing money down a sinkhole \u2013 because no matter how many payments you make, you owe the same amount of money every month (if you\u2019re lucky), and you\u2019re getting no closer to owning your rental home or apartment. <\/p>\n\n\n\n<p>Mortgage payments, on the other hand, are more like lovingly placing that money in a safe deposit box, which home equity gives you the ability to open.<\/p>\n\n\n\n<p><strong>At K. Hovnanian Homes, with meticulous attention to detail and excellent customer service, we take pride in building beautiful <a href=\"https:\/\/www.khov.com\/new-construction-homes\/\" target=\"_blank\" rel=\"noreferrer noopener\">new construction homes<\/a> and communities across the nations \u2013 with a wide offering of homes and designs, you can be sure to find a new home to fit both your lifestyle and your budget.<\/strong><\/p>\n\n\n\n<p><strong>Want to learn more?\u00a0<a href=\"https:\/\/www.khov.com\/contact-us\">Contact Us Today<\/a>\u00a0or use our home search to\u00a0<a href=\"https:\/\/www.khov.com\/new-construction-homes\/\" target=\"_blank\" rel=\"noreferrer noopener\">Find a K. Hovnanian Community<\/a>\u00a0near you!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Home equity is one of the most important concepts to grasp when buying a new home, and one of the fundamental pluses of home ownership: Unlike a home you rent, a home you buy can actually pay you back.\u00a0 <\/p>\n<p>How is that? Well, the reason for that is home equity, and we\u2019re here to explain what it&#8217;s all about!<\/p>\n","protected":false},"author":2,"featured_media":4632,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"ub_ctt_via":"","_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[4,3],"tags":[293,125,294,326],"class_list":["post-3927","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buying","category-research","tag-finance","tag-home-buying-2","tag-home-equity","tag-what-is-home-equity"],"featured_image_src":"\/blog\/wp-content\/uploads\/2023\/04\/What-is-Home-Equity-1140x694-2.jpg","author_info":{"display_name":"K. Hovnanian Homes","author_link":"https:\/\/blog.khov.com\/blog\/author\/khovblog1\/"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is Home Equity and How Do You Use It?<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/blog.khov.com\/blog\/what-is-home-equity-and-how-do-you-use-it\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is Home Equity and How Do You Use It?\" \/>\n<meta property=\"og:description\" content=\"Home equity is one of the most important concepts to grasp when buying a new home, and one of the fundamental pluses of home ownership: Unlike a home you rent, a home you buy can actually pay you back.\u00a0  How is that? 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