What is Home Equity & How Can You Use It? - Mortgage Choice (2023)

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If you own your home chances are you've built up some equity. You can borrow against equity to buy an investment property, renovate or achieve other goals.

Your home equity is the difference between your property's market value and the balance of your mortgage. If you’ve owned your home for a few years, there’s a good chance you’ve built up some reasonable equity in your property. This can be a valuable resource when it comes to property investment.

Equity explained by our home loan expert

Refinancing is often a tactic used to free up the equity you have in your current home in order to fund purchases or lifestyle goals.

Our home loan expert explains the term 'home equity' and how it can be accessed and outlines ways in which it may be used.

  • Free equity loan quote
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Buying an investment property with home equity

Accessing equity in your home is a great strategy to buy another property or renovating. One of the popular ways to access your home equity is to refinance.

  • An equity loan lets you borrow against the equity in your home
  • Your home equity can be used instead of a cash deposit to buy an investment property
  • Investment property loans are often structured around using home equity
  • How much equity you can use will vary between lenders.

Steps to access equity

  • 1

    Calculate the available equity

    Work out the amount of equity available in your property using the estimated market value of your home – commonly based on comparable sales within your area or a real estate agent valuation, less the balance of your current loans secured by the property.

    (Video) Equity explained by our home loan expert

  • 2

    Work out the “accessible” equity

    Work out how much money is required to achieve your plans. You may or may not want to – or be able to – access the full amount of equity that’s available, and your servicing capability is an important factor in this discussion. That is, your ability to service any additional repayments may have an impact on the amount of equity that you can access. Say, for example, that you have $150,000 worth of equity in your property. However, the amount of additional repayments you can afford based on your income and expenses works out to be $50,000; then realistically that’s the amount you would proceed to unlock, rather than the full $150,000 that’s available.

    Table 1: Working out accessible equity

    80% of Property Value

    Remaining loan amount

    Home equity available to access*

    $500,000

    $100,000

    $400,000

    $600,000

    $300,000

    $300,000

    $750,000

    $400,000

    $350,000

    $800,000

    $425,000

    $375,000

    $900,000

    $650,000

    $250,000

    $1,000,000

    $700,000

    $300,000

    $1,250,000

    $700,000

    $550,000

    *Home equity available to access calculated using80% oftotal property value – remaining loan amount

  • 3

    Review your loan options

    At this point of the process, you may want to start researching and assessing your home loan options with a Mortgage Choice broker. This is also a good opportunity for your broker to do a “health check” on your current home loan, comparing it based on factors such as interest rates, fees and features against other options from your current lender or other lenders in the market.

  • 4

    Work out the costs for accessing equity

    The product you choose and the amount of equity you are looking to access may result in various fees and costs. For example, if you choose to access over 80 percent of your property's value, you will likely need to pay Lenders' Mortgage Insurance (LMI). If you decide to switch to another lender, there may be costs such as fees associated with breaking from a fixed rate product, new loan application fee or government fees.

  • 5

    Loan application and settlement

    Once you've decided on a loan option with your Mortgage Choice broker, they'll work with you to get the application process underway and support you at every step to settlement.

Unlocking equity to invest

If you’ve owned your home for a few years, there’s a good chance you’ve built up some reasonable equity, and this can be a valuable resource when it comes to property investment.

We can help you to find out how much equity you have in your home, and how you might be able to use it to own an investment property sooner. Watch this quick video to find out more.

What is Home Equity & How Can You Use It? - Mortgage Choice (1)

(Video) How a Home Equity Loan Works!

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Common questions

How much equity do I have in my home?

The simple way to know how much equity you have in your home is by calculating the difference between the current property's value and the total remaining balance to pay off on your mortgage.

How to calculate your home equity

Calculate home loan equity by taking your property's current market value and subtracting the remaining loan balance.

Property's market value - Remaining loan balance = Your home equity

For example, if your home is worth $700,000 and there is $300,000 remaining on your home loan, you have home equity worth $400,000.

However, bear in mind that not all of this will be accessible, with lenders only allowing you to borrow 80% of the property's value without being charged for Lender's Mortgage Insurance (LMI).

In other words, to avoid paying LMI, keep your Loan to Valuation Ratio (LVR) below 80%. In this given example, that means:

  • 80% of the property's market value = $560,000 (this is the maximum you can borrow without incurring LMI)
  • Remaining balance on loan = $300,000 (this is the amount you have already borrowed)
  • $560,000 - $300,000 = $260,000

So in this example, the amount of equity you can access without incurring LMI would be $260,000.

Remember, even if you have already paid LMI before, you would still need to pay it again if you try to access equity that exceeds 80% LVR.

(Video) The Best Way to Use Home Equity | Morris Invest

How can home loan equity help?

Here's how it works. Let's say you want to buy an investment property with a market value of $400,000. There are also additional purchase costs (legal fees, stamp duty and so on) of $20,000, bringing the total cost to $420,000.

Assuming that you meet the loan approval requirements, a lender will fund 80% of the property’s market value - potentially more if you're prepared to pay Lenders Mortgage Insurance (LMI). That is, the bank will lend you $320,000 to buy the investment property. As the total cost of the property is $420,000 you still need an additional $100,000 for the deposit and other upfront expenses. This can come from the equity in your existing home.

Let's say the market value of your existing home is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000, which is your home equity.

As an investor you can access up to 80% of your home equity (without the need to take out LMI), which equates to $160,000 in this example. Instead of coming up with a cash deposit for the additional $100,000 needed to buy the investment property, you can take this from the $160,000 of accessible equity in your existing home.

The available equity in your home is calculated at 80% of your home (without the need to take out LMI) less any current loans, which equates to $400,000 less $300,000 = $100,000.

Alternatively some lenders will lend up to 95% of the property value less the existing mortgage, where LMI would be paid on the amount borrowed over 80%.

How does equity work when buying a second home?

The way equity works when buying a second home can involve using the available equity in your home as security instead of a usual cash deposit.

What can Equity be used for?

Other common uses other than buying a home, Equity can also be used toward Home Improvements, Car Loans or a holiday, all at Home Loan interest rates, which can be less expensive than using other forms of credit.

Using Equity to Invest guide

Download our guide on home equity to understand what home equity is and how you could use it to start or expand your investing portfolio.

Download now

(Video) Unlocking equity to invest | Money Chat | Mortgage Choice

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Important things to consider when using equity to invest

Many property investment gurus say it’s important to repay the loan on your home as soon as you can. The equity that is drawn down from your home to purchase an investment is tax effective, but any remaining debt on your home isn’t. Therefore the loan on your home costs you much more on an ongoing basis than the loan on your investment property.

The property that you live in is not the only source of home equity. You can also use the equity in an existing investment property to help fund the purchase of another investment property.

Your Mortgage Choice broker can help you to work out how much equity you have in your property and how it can be accessed to fund your investment.

What is Home Equity & How Can You Use It? - Mortgage Choice (14)

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(Video) HELOC vs. Home Equity Loan - What's the Difference?

FAQs

What is home equity? ›

Home equity is the amount of your home that you actually own. Specifically, equity is the difference between what your home is worth and what you owe your lender. As you make payments on your mortgage, you reduce your principal – the balance of your loan – and you build equity.

How do I use my home equity? ›

The most common ways to access the equity in your home are a HELOC, a home equity loan and a cash-out refinance. To tap into your home's equity through one of these options, you'll need to go through a process similar to obtaining a mortgage.

What is home equity quizlet? ›

Define home equity. The difference between the fair market value of your home and the amount that you owe on the mortgage.

What is an example of an equity? ›

Equity is the ownership of any asset after any liabilities associated with the asset are cleared. For example, if you own a car worth $25,000, but you owe $10,000 on that vehicle, the car represents $15,000 equity. It is the value or interest of the most junior class of investors in assets.

Can you use your equity to pay off your mortgage? ›

If you have built up equity in your home but still have a mortgage balance to pay off, you may consider using a home equity line of credit (HELOC) to reduce your monthly payments and the overall interest you pay on your loan.

Can I take equity out of my house without refinancing? ›

Home equity loans, HELOCs, and home equity investments are three ways you can take equity out of your home without refinancing.

How much equity can I use? ›

As the name suggests, usable equity is the equity in your home that you can actually access and borrow against. You can work out the usable equity available by calculating 80% of your property's current value minus what is still owing on the mortgage.

How much equity can I take out? ›

Home Equity Loan

You can borrow 80 to 85 percent of your home's appraised value, minus what you owe. Closing costs for a home equity loan typically run 2 to 5 percent of the loan amount—that's $5,000 to $12,000 on a $250,000 loan.

What is one of the advantages of a home equity loan? ›

Pros of a Home Equity Loan

A fixed interest rate with set monthly payments for a fixed period of time. Lower interest rates than many other common forms of debt. Easy-to-obtain large sums of money that you may not qualify for through other avenues.

What is the best strategy to get out of debt? ›

If you're ready to get out of debt, start with the following steps.
  1. Pay more than the minimum payment. Go through your budget and decide how much extra you can put toward your debt. ...
  2. Try the debt snowball. ...
  3. Refinance debt. ...
  4. Commit windfalls to debt. ...
  5. Settle for less than you owe. ...
  6. Re-examine your budget.
16 Sept 2022

How is the equity in a home determined quizlet? ›

3) Home equity is defined as the market value of the home less the debt owed on the home.

When can I take equity out of my home? ›

Technically you can take out a home equity loan, HELOC, or cash-out refinance as soon as you purchase a home. However, you don't see very many people doing this because you won't have much equity to draw from that early on.

What is the best way to get money out of your house? ›

How to Pull Equity From Your Home
  1. Cash-Out Refinance. If you have a home worth $300,000, and you only owe $150,000, you can refinance your mortgage and pull out more cash. ...
  2. Second Mortgage/Home Equity Loan. ...
  3. Home Equity Line of Credit (HELOC) ...
  4. Reverse Mortgage. ...
  5. Buy a Rental Property With a Blanket Loan.
23 Dec 2020

How much cash can I take out of my home? ›

For a conventional cash-out refinance, you can take out a new loan for up to 80% of the value of your home. Lenders refer to this percentage as your “loan-to-value ratio” or LTV. Remember, you have to subtract the amount you currently owe on your mortgage to calculate the amount you can withdraw as cash.

What is equity easy words? ›

Equity represents the value that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debts were paid off. We can also think of equity as a degree of residual ownership in a firm or asset after subtracting all debts associated with that asset.

What are 5 examples of equity? ›

There are several types of equity accounts that combine to make up total shareholders' equity. These accounts include common stock, preferred stock, contributed surplus, additional paid-in capital, retained earnings, other comprehensive earnings, and treasury stock.

How can I use my home equity to pay off my house? ›

There are two main ways that homeowners can use their home equity to pay down their mortgage:
  1. Home Equity Loans (Second Mortgages) The first is by using a conventional home equity loan, which is sometimes referred to as a second mortgage. ...
  2. Home Equity Lines of Credit (HELOCs)

How do you cash out equity? ›

You can take equity out of your home in a few ways. They include home equity loans, home equity lines of credit (HELOCs) and cash-out refinances, each of which has benefits and drawbacks. Home equity loan: This is a second mortgage for a fixed amount, at a fixed interest rate, to be repaid over a set period.

Can you use your equity to buy another house? ›

Yes, if you have enough equity in your current home, you can use the money from a home equity loan to make a down payment on another home—or even buy another home outright without a mortgage.

How do you know how much equity you have in your home? ›

You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value. This includes your primary mortgage as well as any home equity loans or unpaid balances on home equity lines of credit.

Do you have to pay equity back? ›

How long do you have to repay a home equity loan? You'll make fixed monthly payments until the loan is paid off. Most terms range from five to 20 years, but you can take as long as 30 years to pay back a home equity loan.

Do you need a deposit when using equity? ›

Using equity to buy another property. A popular way to buy a second property, including an investment property, is to use the equity on your existing home, meaning you don't have to put any physical cash towards the deposit. Here's how to calculate and use your available equity.

Can I use equity to renovate? ›

Equity also builds up as the property value appreciates. Your usable equity is the amount you may be able to access to pay for your renovation (or other things, such as buying a car or consolidating debt).

What is the monthly payment on a $50000 home equity loan? ›

Loan payment example: on a $50,000 loan for 120 months at 6.90% interest rate, monthly payments would be $577.97.

How long does it take to gain equity in a home? ›

Plus, it usually takes four to five years for your home to increase in value enough to make it worth selling. There are some things you can do, however, to build home equity a little faster: Avoid an interest-only loan.

How long do home equity loans last? ›

Repayment terms usually start at five years, but can be stretched to between 10 and 30 years, depending on your home equity lender. Just as some homeowners may choose a longer-term mortgage and pay it off early, you may opt for a longer home equity loan term length and make extra payments to pay it down faster.

What are the pros and cons of home equity investment? ›

Home equity loans: Advantages and disadvantages
  • Pros.
  • ● Lower monthly payments.
  • ● Proceeds that can be used for any purpose.
  • Cons.
  • ● Your home secures the loan, so your home is at risk.
  • ● You have to borrow a lump sum.
  • ● ...
  • Pro #1: Home equity loans have low, fixed interest rates.
1 Apr 2022

What are the 3 biggest strategies for paying down debt? ›

In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt.

How can I get out of debt collectors without paying? ›

There are 3 ways to remove collections without paying: 1) Write and mail a Goodwill letter asking for forgiveness, 2) study the FCRA and FDCPA and craft dispute letters to challenge the collection, and 3) Have a collections removal expert delete it for you.

How do I stop living paycheck to paycheck? ›

How to Stop Living Paycheck to Paycheck: 7 Ways to Break the...
  1. Set a Budget. To break out of the paycheck-to-paycheck cycle, you'll need to create a budget. ...
  2. Focus on the Essentials. ...
  3. Prepare for the Unexpected. ...
  4. Get Out of Debt. ...
  5. Increase Your Income. ...
  6. Limit Purchases. ...
  7. Increase Your Down Payment.
11 Jul 2022

Why does the value of a home depend on the demand for homes What factors influence the demand for homes? ›

The primary factor influencing demand for housing is the price of housing. By the law of demand, as price decreases, the quantity of housing demanded increases. The demand for housing also depends on the wealth of households, their current income, and interest rates.

Which of the following refers to the fair market value of a home minus the outstanding mortgage balance? ›

Home equity is calculated as the fair market value of the home, minus the outstanding unpaid balance owed on the property's mortgage loan, and the total of any other liens on the property.

How does the maturity of a loan affect the monthly payments What should you consider when selecting the maturity? ›

A longer maturity loan will have lower monthly payments but with more interest. You should consider how much liquidity you have and if you are able to pay the monthly payments when choosing a loan. responsible for any unpaid balance if the borrow doesn't repay the loan.

How does equity work in a house? ›

Home equity is the portion of your home that you own, calculated by subtracting your mortgage balance from the home's market value. Say your home is worth $250,000 and you owe $150,000 on your mortgage. To determine your home equity, you would use the following calculation: $250,000 − $150,000 = $100,000.

What is home equity and how does it work? ›

Your home's equity is the difference between the appraised value of your home and your current mortgage balance. Through Bank of America, you can generally borrow up to 85% of the value of your home minus the amount you still owe. For example, say your home's appraised value is $200,000. 85% of that is $170,000.

What is the interest rate on a home equity loan? ›

Home equity loans have fixed interest rates, which means the rate you receive will be the rate you pay for the entirety of the loan term. As of Sep. 28, 2022, the current average home equity loan interest rate is 7.06 percent. The current average HELOC interest rate is 7.12 percent.

How can I get money from my house without selling? ›

Leverage your home

A reverse mortgage pays out the equity in your home to you as cash, with no payments due to the lender until the homeowner moves, sells the property, or dies. The amount you owe increases over time, while the amount of equity decreases.

How does borrowing against your own money work? ›

You can borrow against your own money again and again. Another benefit is that you continue to earn interest on your savings while you pay back the loan. Basically, you're cutting down the amount of interest you pay since you're still earning money at the same time.

What can I do with an extra house? ›

5 Unique Ways to Use Your House for Extra Income
  1. Vacation rental sites. Chances are, you've heard of Airbnb, Homeaway, and VRBO and may have even used one of the sites before to book a vacation home. ...
  2. Income property. ...
  3. Rent your driveway. ...
  4. Put your creative skills to the test. ...
  5. Work from home.

How much cash can you withdraw without reporting to IRS? ›

A person must file Form 8300 if they receive cash of more than $10,000 from the same payer or agent: In one lump sum.

How much money can I deposit in the bank without being reported? ›

How Much Money Can You Deposit Before It Is Reported? Banks and financial institutions must report any cash deposit exceeding $10,000 to the IRS, and they must do it within 15 days of receipt.

How much cash can I withdraw from a bank before red flag? ›

Withdrawals of $10,000

More broadly, the BSA requires banks to report any suspicious activity, so making a withdrawal of $9,999 might raise some red flags as being clearly designed to duck under the $10,000 threshold. So might a series of cash withdrawals over consecutive days that exceed $10,000 in total.

When can I pull equity out of my house? ›

Technically you can take out a home equity loan, HELOC, or cash-out refinance as soon as you purchase a home. However, you don't see very many people doing this because you won't have much equity to draw from that early on.

What does it mean to take equity out of your home? ›

A home equity loan can be a second loan on your home. So you keep the first mortgage and take out another. You can do this in a lump sum or a home equity line of credit, which is like a checking account on your house. Lenders call these HELOCs for short. You only pay interest on what you take out.

Can I take equity out of my house without refinancing? ›

Home equity loans, HELOCs, and home equity investments are three ways you can take equity out of your home without refinancing.

What is the monthly payment on a $100 000 home equity loan? ›

Loan payment example: on a $100,000 loan for 180 months at 6.49% interest rate, monthly payments would be $870.56.

Do you have to pay back equity? ›

When you get a home equity loan, your lender will pay out a single lump sum. Once you've received your loan, you start repaying it right away at a fixed interest rate. That means you'll pay a set amount every month for the term of the loan, whether it's five years or 15 years.

How much equity can I use? ›

As the name suggests, usable equity is the equity in your home that you can actually access and borrow against. You can work out the usable equity available by calculating 80% of your property's current value minus what is still owing on the mortgage.

Why is it good to have equity in your home? ›

Why Is Building Equity Important? Building equity increases the amount of money you have in your home that you may be able to use now or in the future. You can borrow from your equity as a loan, invest it, build long-term wealth or sell your home for more than you owe and keep the difference.

Can I use equity from one house to buy another? ›

Yes, if you have enough equity in your current home, you can use the money from a home equity loan to make a down payment on another home—or even buy another home outright without a mortgage.

How do you know how much equity you have in your home? ›

You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value. This includes your primary mortgage as well as any home equity loans or unpaid balances on home equity lines of credit.

How can I get money out of my house without selling? ›

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.

How long do you have to pay back a home equity loan? ›

A home equity loan term can range anywhere from 5-30 years. HELOCs generally allow up to 10 years to withdraw funds, and up to 20 years to repay. A cash-out refinance term can be up to 30 years.

Is home equity loan cheaper than refinancing? ›

If your current mortgage is satisfactory, home equity loans can be a less expensive option for consumers who need access to cash, while refinancing may be a way to lower monthly payments or save money on interest.

How long do home equity loans last? ›

Repayment terms usually start at five years, but can be stretched to between 10 and 30 years, depending on your home equity lender. Just as some homeowners may choose a longer-term mortgage and pay it off early, you may opt for a longer home equity loan term length and make extra payments to pay it down faster.

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2. HELOC Vs Home Equity Loan: Which is Better?
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3. HELOC Explained (and when NOT to use it!)
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4. Mortgage Minute: Equity explained
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5. Home Equity Line of Credit - Dave Ramsey Rant
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6. Unlock Your Home's Equity - 3 Ways to Access Cash WITHOUT Selling!
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