House prices have soared nationally as low mortgage rates have fueled buyer demand. The result? Real estate owners today sit on much more equity.

In fact, homeowners with mortgages added $ 2.9 trillion in equity in the second quarter of 2021, CoreLogic reports. That’s an average profit of $ 51,500 per borrower since the second quarter of 2020. It also means you now may have more opportunities to use that equity to your advantage.

What actually is home equity?

Home equity refers to the portion of your home that you fully own. One easy way to calculate the equity you have in your home is to take the market value of your property and subtract your mortgage balance. For example, if your home is worth $ 400,000 but you owe $ 250,000 on your mortgage, you have $ 150,000 in equity.

How to benefit from home equity

If you sell a home that you have a lot of equity on, you will get a higher payday after you close your mortgage balance and pay your real estate agent fees. But even if you don’t sell your home, you can still use your equity as a source of cash by borrowing using these options.

Home loan

With a home equity loan, you borrow a lump sum that you pay back in equal installments over time. You can get a home loan for any reason – it doesn’t have to be to improve your home. However, it is common for property owners to take out home loans to cover things like repairs and renovations. Our guide to the pros and cons of having a home loan can help you figure out if one is right for you.

HELOCs

A home equity line of credit (HELOC) gives you access to an amount of money that you can typically withdraw over a period of five to ten years. How much money you have to repay depends on the amount you actually borrow.

When it comes to HELOCs vs. home equity loans, HELOCs are more flexible. They allow you to borrow money when you need it instead of committing to a lump sum upfront. However, HELOCs tend to have floating rates associated with them, while home equity loans typically have fixed rates. This means that HELOC payments can change over time.

HELOCs also allow you to borrow money for any reason. You could take out a HELOC and use the proceeds to start a business or go on vacation (although the latter is not really advisable as it is generally not a good idea to get into debt just for travel).

Cash-out refinancing

With a cash-out refinance, you borrow more than your remaining mortgage balance. For example, you could turn a $ 250,000 mortgage into a $ 300,000 loan if you have enough equity in your home. From there, you would receive a check for $ 50,000 after you paid back $ 250,000 to your refinancer. You then have the option to use that $ 50,000 as you see fit.

Since today’s refinance rates are very competitive, cash-out refinancing can be a very inexpensive way to borrow against your home equity. And like with home loans, your monthly payments are fixed and predictable.

Should You Be Using Your Home Equity?

When you borrow against your home equity, you take on debt. And if you don’t pay back that debt, you risk losing your home. Because of this, it is important to exercise caution when tapping into your home equity.

However, if you need to borrow money, all of the above options can be far more cost effective than alternatives like a personal loan. Right now, many homeowners are sitting on more equity than they saw in their lifetime. As long as you borrow responsibly, there is nothing wrong with taking advantage of this situation.