Ways of Tapping Into Your Utah Home Equity

You'll often hear homeownership referred to as a form of investment, and one of the positive sides of this theme is the common ability for homeowners who have built up equity in their home to tap into said equity for their own purposes. What are some of the reasons you might consider doing this, and how can it be done?

At Integrity First Lending, we're happy to assist clients with a wide range of mortgage loan and homeownership needs for Utah clients, including many forms of mortgage refinancing -- such as the cash-out refinance, one of the options we'll be going over during this blog. Here's a primer on the various reasons why some homeowners will look to tap into their home equity, plus some of the ways that you can go about doing so if you're looking to go down this road.

What is Home Equity and How is it Built?

First and foremost, for those who are new to the topic, let's briefly touch on what home equity is and how it is built. Home equity refers to the portion of your home that you own outright -- i.e., the difference between your home's current appraised value and the outstanding balance on your mortgage loan. As you make mortgage payments and/or your home appreciates in value, your home equity will grow.

Since home equity is often used as collateral for second mortgages and home equity loans, it's important to know that if you default on your mortgage loan, your lender may attempt to recoup their losses by foreclosing on your home. As such, it's generally advisable to only tap into your home equity when you're confident that you can keep up with your mortgage payments, even if unforeseen circumstances arise.

Reasons to Tap Into Your Home Equity

Now that we've established what home equity is, let's take a look at some of the reasons why homeowners will tap into this portion of their investment. Some common reasons include:

• Paying off loans or debts: Homeowners with substantial equity in their home may be able to qualify for a cash-out refinance loan, which they can use to pay off high-interest debt or other loans. This can potentially save them money in the long run by consolidating their debts into a single, lower-interest loan.
• Making home improvements: Home equity can also be used to finance home improvement projects, which can add value to your home. This is a particularly popular use for home equity among older homeowners who are looking to make their homes more comfortable or accessible as they age.
• Paying for education: Home equity can also be used as a way to help pay for college tuition or other educational expenses.
• Making a large purchase: In some cases, homeowners may use their home equity to make a large purchase, such as a second home or a new car.

How to Tap Into Your Home Equity

Now that we've gone over some of the reasons why you might want to tap into your home equity, let's take a look at your practical options for doing so:

• Cash-Out Refinance: As we noted above, a cash-out refinance loan allows you to tap into your home equity by refinancing your mortgage loan for more than you currently owe and receiving the difference in cash. This can be a good option if you're looking to consolidate debt or make home improvements, as it may allow you to secure a lower interest rate than you're currently paying. There are also risks associated with cash-out refinances, so be sure to speak with a mortgage loan officer to see if this option is right for you.
• Home Equity Loan: A home equity loan is a second mortgage that allows you to borrow against the equity in your home. Home equity loans typically have a fixed interest rate and repayment period, making them a good choice if you need a lump sum of cash for a one-time expense.
• Home Equity Line of Credit: A home equity line of credit, or HELOC, is a type of revolving credit that allows you to borrow against your home equity up to a certain amount. This can be a good option if you're looking for more flexibility in how you use the funds, as you can borrow what you need as you need it and make payments on the outstanding balance as you're able.

As you can see, there are a number of ways that homeowners can tap into their home equity. If you're considering doing so, be sure to speak with a mortgage loan officer to discuss your options.

Calculating Your Equity

How can you tell if you have enough equity in your home to qualify for a home equity loan or HELOC? There are a few different ways to calculate your home equity, but the most common method is to take your outstanding mortgage balance and subtract it from your home's current market value.

For example, let's say you own a home that's currently worth $200,000 and you have an outstanding mortgage balance of $100,000. This means you have $100,000 in home equity.

If you're interested in taking out a home equity loan or HELOC, most lenders will require that you have at least 20% equity in your home. So in the example above, you would need to have at least $40,000 in home equity to qualify.

Keep in mind that your home's market value can fluctuate over time, so it's important to stay up-to-date on your home's value if you're thinking of tapping into your equity. You can do this by speaking with a real estate agent or using an online home value estimator.

For more on home equity and how to tap into it, or for help with any of our home loan programs throughout Utah, speak to the team at Integrity First Lending today.