Home equity is a valuable asset many homeowners build over time. When they gradually pay down their mortgage balance or if their property values rise, homeowners can tap into that equity. It can be used to help fund home improvements, consolidate debt, cover major expenses and more.
Different home equity products work in different ways. Comparing their features can help you choose the option that matches your borrowing needs.
Click to navigate:
- What Is Home Equity?
- Three Ways to Tap Into Your Home's Equity
- Using Home Equity for Home Improvements
- Use Home Equity for Major Expenses and Financial Goals
- Why Home Equity Borrowing May Cost Less Than Other Forms of Debt
- The Bottom Line
What Is Home Equity?
Home equity is the difference between your home's current value and the amount you still owe on your mortgage. As your home's value increases and you pay down your mortgage balance, your equity can grow.
Three Ways to Tap Into Your Home's Equity
There are several ways to convert a portion of your home equity into funds.
Home Equity Loan*
A home equity loan allows you to borrow against your available equity and receive the funds in a lump sum.
The Newrez Home Equity Loan allows eligible homeowners to access a lump sum of cash through a second mortgage while keeping their current mortgage and interest rate in place. It features a fixed interest rate and fixed monthly principal-and-interest (P&I) payments. This makes it a strong option if you know how much you need to borrow and want to make fixed monthly payments. You’ll also be able to keep your existing mortgage and its current interest rate.
Home Equity Line of Credit (HELOC)**
A HELOC is a revolving line of credit secured by your home. You'll receive an initial draw at closing and may be able to request additional draws up to your approved limit during the draw period, subject to program requirements. It can be a good fit if you need flexibility for ongoing expenses or projects completed over an extended period of time.
Keep in mind that HELOCs typically have variable interest rates, meaning the rate and payment may change over time.
Cash-Out Refinance***
A cash-out refinance replaces your existing mortgage with a new mortgage for a larger amount than you currently owe. You receive the difference in cash. Refinancing can be a good fit if you can get a lower rate than you did on your original mortgage, possibly because of an improved credit score, debt-to-income ratio or if you purchased when rates were higher.
Using Home Equity for Home Improvements
Homeowners can use home equity to finance home improvements that may be difficult to pay for out of pocket. Home upgrades can improve a home’s comfort, functionality and potentially increase property value.
For example, funds might be used for:
- A kitchen makeover
- A bathroom update
- Energy-efficiency improvements
- HVAC upgrades
Use Home Equity for Major Expenses and Financial Goals
Homeowners may use home equity funds for a wide range of financial goals. For example, some borrowers may use the proceeds to consolidate higher-interest debt, while others may use the funds to help pay for college tuition, cover large medical expenses or finance a wedding or other significant life event. Home equity may also provide a source of funds for major purchases or unexpected expenses when savings alone may not cover the cost.
Before borrowing, it's important to evaluate your budget and financial goals to determine whether tapping your home equity is the right choice for your situation.
Why Home Equity Borrowing May Cost Less Than Other Forms of Debt
Different types of loans can be helpful for different financial needs. The right choice depends on your goals, budget, and what monthly payment feels comfortable for you.
Because home equity loans and lines of credit are backed by your home, they may come with lower interest rates than some other types of borrowing, depending on your credit profile and loan terms1. For example, credit cards may come with high interest rates, which can make them more expensive over time, compared to lower interest options.
Depending on loan rates and terms, taking out a home equity loan could allow you to borrow at a lower interest rate than you would with other forms of debt, which could potentially reduce your monthly payment. The important thing is to choose a loan that fits your budget and that you feel confident you can repay.
The Bottom Line
Your home equity may be one of your most valuable financial resources. Whether you're planning home improvements, consolidating debt, covering a major expense or preparing for future financial needs, there are several ways to put that equity to work.
Home equity loans, HELOCs and cash-out refinances each offer different benefits depending on how you plan to use the funds and how you prefer to borrow. Understanding the differences between these options can help you choose the solution that best aligns with your financial goals.
If you're interested in tapping into your home's equity, Newrez offers multiple options to help eligible homeowners access funds. Contact Newrez today to learn more about your home equity borrowing options.
