How to Take Equity Out of Your Home (Avoid These Mistakes)

So you’ve bought a home, taken out a mortgage, and started paying that mortgage down.

Congrats! 

You, my friend, have equity in your home!

But how can you actually access home equity?

The median American home is worth $467,700. Talk about value!

And, lucky for you, it doesn’t have to just sit there. It can be “tapped” to help pay for expenses in the real world.

Below, I’ll explain how to take equity out of your home and how to avoid some of the most common mistakes homeowners make when accessing their home equity.

What is Home Equity?

Home equity is the portion of your home’s value that you own outright. In other words, it’s the market value of your home minus the amount that you still owe on your mortgage. 

Let’s say your house is worth $300,000, and you still owe $100,000 on your mortgage. That means your home equity is $200,000. 

Remember, home equity isn’t a static number. Two main factors affect it: 

1. Fluctuating home values. If the property becomes more valuable, the equity increases. 
2. Paying off your mortgage. The more payments you make, the less you’ll owe, and the more equity you’ll have in your home. 

Home equity is an important asset, but it isn’t so easy to access. That’s why it’s worth learning how to take equity out of your home.

How to Calculate Your Current Home Equity

Home equity is the difference between your home’s appraised value and the amount you owe on your mortgage. That makes calculating it pretty straightforward.

Here’s the formula:

Appraised Value – Amount Owed on Mortgage = Home Equity

Imagine your home is worth $200,000, and you still owe $50,000 on your mortgage. That means your calculations look like this:

$200,000 – $50,000 = $150,000

So you have $150,000 in home equity. Congratulations, hypothetical homeowner! That’s pretty good!

But there’s another number worth calculating: your loan-to-value ratio, or LTV. This shows you what percentage of your home’s value you still owe on your mortgage. 

Here’s the simple formula:

Amount Owed on Mortgage ÷ Appraised Value = LTV

For our example, we’ll use the same numbers as before – so your home is worth $200,000, and you owe $50,000 on your mortgage. 

$50,000 ÷ $200,000 = 0.25

LTV is usually shown as a percentage. That means your LTV in this scenario is 25%, which is awesome! 

Remember, LTV is like golf – the lower the number, the better!

Your loan-to-value (LTV) ratio is important, especially if you’re considering applying for a home equity loan. 

Most lenders use LTV to determine how much of a risk you’d be as a borrower. 

Lenders are often willing to give loans that add up to around 90% of your home’s value, but your current mortgage is part of that 90%. 

So if your LTV is currently 25%, you’re likely to get another 65% to work with.

Ways to Take Equity Out of Your Home

Wouldn’t it be nice if you could access home equity for groceries? For medical bills? For whatever else your heart desires?

Good news – you can! 

Check out the options outlined below. This way, you’ll know how to take equity out of your home when the time comes. 

1 – Home Equity Loan

A home equity loan is exactly what it sounds like: a loan that’s secured with the equity you have in your home.

Let’s get specific: 

Lots of loans have collateral or something you offer to give up if you fail to make good on the loan. In this case, the collateral is your home equity. 

You’ll get the money as a lump sum, and then you’ll pay it back with interest. Most home equity loans come with a fixed interest rate, meaning it’s locked in. 

The risk here is obvious: Fail to make monthly payments, and you’re staring a foreclosure in the face. You could also be in hot water if the value of the property takes an unexpected dip. 

That doesn’t mean a home equity loan isn’t right for you! 

It just means you should consider other options before making a final decision.

2 – Home Equity Line of Credit (HELOC)

A home equity line of credit, or HELOC, is like a home equity loan – except you get a line of credit instead of a single lump sum.

A line of credit means you can borrow up to a certain amount, but you don’t have to. Basically, it’s like having a credit card, but one that’s secured by the equity in your home.

One thing to consider: A home equity line of credit (HELOC) usually comes with a variable interest rate. That means your rate could go up even after you’ve signed the agreement.

3 – Unlock

Unlock is a service providing “home equity agreements,” which allow you to access home equity without using a loan.

In exchange for an upfront sum, you give Unlock a share of your home’s future appreciation in value.

Your home is likely to increase in value, right? 

That “appreciation” will become a profit when you eventually sell your home. So in a home equity agreement, you agree to give Unlock a certain percentage of that profit in exchange for getting some of your home’s equity ahead of time.

Here’s how the process plays out:

1. Unlock sends you money
2. You sell your home (or buy them out) within a 10-year period
3. You pay back the money they originally gave you (typically with the proceeds from selling the home)
4. You also give Unlock an agreed-upon share of your home’s appreciation in value since the time you made the agreement

With Unlock and similar services, there are no interest or monthly payments. So if you’re wondering how to take equity out of your home, let me tell you – Unlock is a seriously solid option. 

4 – Hometap

Hometap is another service that lets you access home equity without using a loan.

Hometap is similar to Unlock. They give you money upfront, and you have ten years to settle. 

During that time, you can either sell your home and pay them with the proceeds or buy them out some other way. 

The advantages of this approach are simple: no interest and no monthly payments. 

One thing to remember: Hometap isn’t available in every state. So check if you’re eligible before setting your heart on using the service. 

5 – Unison

Unison is another service for “home equity agreements,” allowing you to access your home equity in exchange for a share of your home’s value.

While Unison’s model is similar to what you get with Unlock and Hometap, some of the details are different.

Let’s start with the good news: Unison is available in more states than its competitors. If you’re in Wisconsin, for example, you might not have many other options (so welcome to Unison, Cheeseheads!). 

Unison also provides longer terms – up to 30 years! That could be helpful if you’re not planning on selling your home within the next decade.

But here’s the downside: Unison requires a credit score of at least 680 to qualify. 

Not quite there? Then Unlock or Hometap could be better. 

6 – Cash-Out Refinance

A cash-out refinance allows you to replace your current mortgage with a new one, giving you access to much of the equity you already have in your home.

To use this strategy, you’ll have to qualify, which isn’t always easy, especially in an era of rising interest rates. 

And if you pull it off, you’ll likely face one of two things:

• Higher monthly payments than what you had with your previous mortgage
• A mortgage that takes longer to pay off – meaning you’ll end up spending more in interest over the lifetime of the loan

So a cash-out refinance isn’t a perfect strategy, but it’s one to consider as you investigate how to take equity out of your home.

Top Mistakes to Avoid When Taking Equity Out of Your Home

So I’ve talked about how to take equity out of your home. But there’s another question that’s just as important:

How should you NOT take equity out of your home?

Here are some of the biggest mistakes to avoid:

• Tapping home equity to make risky investments. Want to speculate? Want to buy stocks or make other uncertain investments? Then do it with money you’ve saved, not the equity in your home. 

• Tapping home equity to pay for college. There are better (and less risky) ways to fund an education. Traditional student loans, while costly, are probably a better option. 

• Spiraling into debt by taking out multiple home equity loans. Tapping home equity can feel like magic. Sign some papers, and voila! You’ve got cash on hand. But it’s not so simple. Keep taking out home equity loans, and you’ll increase debt without building home equity. 

• Failing to invest in home improvement. Remember, your home’s market value lies at the heart of home equity. If you’re using home equity to secure loans or get cash upfront from a company like Unlock, then you want your home’s value to increase. So use some of the money you get for projects that will lift that market value! 

Commonly Asked Questions About How to Take Equity Out of Your Home

Is it a Good Idea to Take Equity Out of Your House?

Taking equity out of your house is often a good idea, especially if you’re sure you can make any related loan payments and you plan to use the money for home improvement. 

Can I Take Equity Out of My House Without Refinancing?

There are several ways to take equity out of your house without refinancing. One way is by using Unlock, which gives you money upfront in exchange for a portion of your home’s future appreciation in value. Other options include home equity loans or home equity lines of credit (HELOCs). 

How Much Equity Can You Take Out of Your Home?

You can often take around 80-90% of your home’s appraised value, but remember, what you owe on your existing mortgage counts towards that percentage. When considering how to take equity out of your home, you should start by calculating your current loan-to-value (LTV) ratio. 

How Soon Can You Pull Equity Out of Your Home?

You can start to tap your home equity as soon as you buy the home, but you’re honestly better off waiting. The longer you wait, and the more of your mortgage you pay off, the more equity you’ll have access to. So patience is truly a virtue. 

Cheapest Way to Get Equity Out of House?

A home equity line of credit or HELOC is likely your cheapest option for getting equity out of a house. There are no closing costs, and you only draw the money you actually need, meaning you won’t burden yourself with unnecessary debt. But Unlock is another affordable option and one that doesn’t charge interest!  

How to Get Equity Out of Your Home With Bad Credit?

Unlock provides a perfect solution if you’re wondering how to get equity out of your home with bad credit. The minimum credit score is only 500. 500! There aren’t many financial services you can use with a score as modest as that!

Best Time to Take Equity Out of Your Home?

The best time to take equity out of your home is when you’ve paid off a hefty portion of your mortgage. Remember: The more you’ve paid off, the smaller your loan-to-value (LTV) ratio – which means lenders will offer more money.

How Much Equity Can I Borrow From My Home?

You can often borrow about 80-90% of the equity from your home. The exact percentage will depend on the specific lender and personal factors like your credit score and income.