How to tap into your home's equity if you aren't ready to sell

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In the last decade, a surge in home prices has built considerable wealth for the middle class.

Total housing wealth grew by $8.2 trillion between 2010 and 2020, according to a March report from the National Association of Realtors. The coronavirus pandemic’s housing boom added even more value to homes.

But unless people plan to sell their houses — which can be a difficult feat in a hot housing market — there are only a few ways to tap into that increased equity.

“You can’t eat your equity, but if you can monetize some of it to reduce debt and make life easier from a cash flow perspective, that makes a ton of sense in most situations,” said Dennis Nolte, a certified financial planner and vice president at Seacoast Bank in Winter Park, Florida.

Here’s what financial experts recommend.

Cash-out refinance

One way to get money from your home’s increase in value is to refinance. By using a cash-out refinance, you’d also be able to add some liquidity to your savings or put the money towards another goal.

Here’s how it works: You refinance your home with a larger mortgage than you previously had to get the difference back in cash. In some instances, it may be a win-win situation — if you’re able to refinance at a lower rate or reduce your monthly payments.

It may not be the best option for homeowners right now, however. That’s because interest rates are rapidly rising, and with them, mortgage rates. That makes it less likely that someone would be able to refinance now for a more attractive rate.

“Rates have shot up so quickly that refinancing at these interest rates could be as much as twice what their current rate is,” said Jackie Frommer, chief operating officer of lending at Figure, a financial services company. “That just doesn’t make sense.”

It can also be expensive to refinance, as there are extra closing fees involved.

Home equity loan

A home equity loan can help you access some of your house’s appreciated value. It’s a loan that you take out against the value of your home and pay off over a set period, generally 10 to 30 years.

These loans do include closing costs and can also include fees, as well. In addition, you must take out a lump sum — say, $100,000 — and pay off the entire amount plus interest. Usually the interest rate is fixed, however, which can help you budget long-term.

Right now, home equity loan rates generally range from 3% to 12%, depending on the borrower, according to Bankrate.

Home equity line of credit

A home equity line of credit, also known as a HELOC, is one of the best ways to access equity in your home without selling it.

Instead of taking out a loan at a fixed amount, a HELOC opens a pool of money that you can utilize, but you don’t have to take it all at once or use it all. For instance, instead of having a $100,000 loan, you could have access to a $100,000 HELOC that you could draw on only when you needed it for something like an emergency repair or renovation.

“You have a pool of money you can draw on and it doesn’t cost anything unless you use it,” said Thomas Blackburn, a CFP with Mason & Associates in Newport News, Virginia, adding that he recommends them for a lot of people.

“It’s almost like insurance,” said Nolte, adding that like life insurance policy it makes sense to have a HELOC in place before you need to draw on it.

Currently, interest rates are low on HELOCs. People with good or excellent credit — generally a FICO score of 670 or more — can get HELOCs with rates from 3% to 5% according to Bankrate. Those with fair scores or lower may see rates in the 9% to 10% range.

“Now might be a good time to lock in those lower interest rates as we’ve seen they’re gone a little higher and will continue to,” said Brittney Castro, CFP at Mint.

Ways to use home equity

In addition to tapping into your home’s equity to renovate, repair or expand it, financial advisors also recommend using it to pay down other debt.

This especially makes sense if you have high interest rate credit card debt, said Blackburn. Average rates on credit cards are currently more than 16%, according to Bankrate.

“Some people have come to us and they’ve had various forms of debt and have kind of gotten paralyzed trying to figure out how to pay it all off with high interest rates; meanwhile, their home has accrued quite a bit of equity,” he said.

If that’s the case, it may make sense to pay off credit card debt with a HELOC or a cash-out refinance, therefore locking in a lower interest rate.

“It’s a nice bridge,” Blackburn said.

Of course, this should go hand in hand with a plan to pay back the HELOC, home equity loan or cash-out refinance.

“You want to make sure that you add in any payment into your budget and can really afford it based on everything else you’re working toward,” Castro said..

“It shouldn’t be taken lightly; there should be a strategy behind it,” Blackburn said.

In addition, HELOCs generally use variable rates, so over time, the interest on the line of credit is going to go up, said Nolte. While in the short term, it may still make sense to utilize a HELOC, it’s important to have a plan to pay off the line before rates go up too much.

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