As prices continue rising, almost 70% of Americans say they’ve been using their savings to deal with the increased costs of food, fuel and everything else. Cashing in your savings isn’t the best way to manage inflation, as you may need the savings for emergencies down the road. But if you’re not able to cut back on spending or find ways to increase your income, you may find yourself needing extra cash as record inflation continues to drive prices higher.
If you need extra money and you own a home, you might consider tapping into your home equity. Home prices have skyrocketed in recent years; for example, the average home price increased more than 20% from May 2021 to May 2022. If your home’s value has increased, you may have a large amount of equity available—and that could come in handy.
What is home equity?
Home equity is the difference between the value of your home and the amount you owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity.
As you make mortgage payments and pay down the principal on your loan, your equity increases gradually; that is, over time, you own more and more of your home outright. Your equity can also increase when the value of your home increases, such as when prices rise due to increased demand.
How can I cash in on home equity?
You can cash in on the equity in your home by taking out a home equity loan or a home equity line of credit (HELOC). A home equity loan gives you one lump sum, and a HELOC provides you with a predetermined amount that you can access when you need it. With a home equity loan, you start repaying the loan plus interest right away. If you have a HELOC, you pay only interest on the amount you’ve withdrawn for a certain period (usually 10 to 15 years), and then start the repayment period.
Whether you use a home equity loan or line of credit, you’re borrowing against the equity in your home. Because the loan is secured by your home, it usually comes with a lower interest rate than other types of loans.
How much cash can I get for home equity?
Most lenders will loan up to 80% of the equity in your home. Using the example above, say your home is worth $300,000 and you owe $200,000. Your equity, or outright ownership in the home, is $100,000. If your lender allows you to borrow up to 80% of your equity, you’d be able to borrow up to $80,000.
How can I use home equity funds?
If you cash out your home equity, you are free to use the funds in whatever way you choose. You may use them for day-to-day living expenses, remodeling or home repairs, college tuition, or to purchase another home.
Depending on how you use the funds, you may be able to deduct the interest you pay on a home equity loan from your taxable income. The IRS allows you to deduct interest paid on a home equity loan or HELOC if you use the money to “buy, build or substantially improve” your home. If you use home equity funds in other ways, you can’t take a tax deduction for the interest.
How much will it cost to use my home equity?
Interest rates are rising on all types of loans right now, and that includes home equity loans and HELOCs. In an effort to curb inflation, the Federal Reserve is conducting a series of rate hikes throughout 2022, which is expected to continue driving interest rates higher. Current home equity rates average around 5% to 7%.
While home equity rates may be higher than they were a year ago, they are often lower than the interest rates for other types of credit, such as personal loans and credit cards. If you need cash and have equity in your home, tapping into home equity may be one of the most affordable ways to access cash.