How to Get Money from Home Equity

As you build equity in the home, you can begin to access it for cash. However, accessing the equity in your home for cash isn’t always the best idea. Depending on how you go about accessing your home’s equity, you could end up with bigger problems.

home equity

What is Home Equity?

At its most basic level, home equity is ownership in your home. People talk about “buying a home” and “owning a home”, but the reality is that you probably borrowed money to pay for your home. As a result, it is actually the bank that has a bigger ownership stake in the home. When you pay down the principal on your mortgage, you are increasing the ownership you have in your home. Your home equity can also increase if the value of your home goes up.

Your home equity is often represented by a percentage. It’s the difference between the balance on your mortgage, and the market value of your home. So, if your home is worth $200,000 and you still owe $160,000 on your mortgage, you have 20% equity in your home.

Accessing Your Home’s Equity

Once you you have built up equity in your home, it’s possible to access it for cash. Some of the ways you can access your equity include:

Home Equity Loan or Line of Credit

This is one of the most popular ways to gain access to the cash value built up in your home. Basically, you borrow against the value you have built up. The equity in the home becomes collateral. When you get a home equity loan or line of credit, you do have to pay interest, since it is, in fact a loan.

One of the problems with getting a home equity loan or a line of credit is that you will have to pay additional costs. Not only that, but you are eroding the ownership you have built up in your home. If something happens, and you can’t make your payments, you could lose your home to foreclosure — even if you are up to date on your first mortgage payments.

Many people consider using their home equity to consolidate credit card debt. While this can provide a possible tax break (the interest on a home equity loan is often deductible), and the interest charges are lower, the fact of the matter is that you have just taken unsecured debt and then secured it with your home.

Reverse Mortgage

For senior citizens, one way to tap their home equity is through a reverse mortgage. With this type of home loan, the bank makes payments to you. The reverse mortgage doesn’t have to be repaid until you stop living in the house, or until you die. If you are careful and get a loan backed by the government, certain requirements have to be met — including that repayment can’t be more than the market value of the home.

However, even if your reverse mortgage is among the best available, there are still potential problems. First of all, the fees and interest rates on reverse mortgages are ridiculously high, eating into the amount of money you can access. Another issue is that you might have to start making payments when you move out of the house. This means that if you end up going to a long-term care facility, your finances could be strained as you try to make reverse mortgage payments or try to sell the home to repay the loan.

Downsizing

Another strategy to tap the equity in your home is to downsize. If you no longer need the size of home that you have, you can sell it and buy something smaller. This tactic works best if you have already mostly paid of your current home. That way, when you sell, you have enough to buy a smaller place — and keep the difference for your own use.

This is one of the better ways to access the equity in your home, since you aren’t paying extra interest in order to take advantage of what you already own. However, you still have to go through the trouble of selling your home, and possibly your stuff, before you move into your smaller place.

Would you access the equity in your home?

Photo by nikcname.

About the Author

By , on Jun 5, 2013
Miranda
Miranda is a freelance writer and professional blogger, specializing in financial topics. She has written for a number of financial web sites, and her work has been linked to by many publications, online and off. Miranda's blog is Planting Money Seeds.

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{One Comment}

  1. Great breakdown on an often misunderstood topic–you certainly cleared up a few things for me!

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