{"id":21112,"date":"2025-03-14T11:04:30","date_gmt":"2025-03-14T17:04:30","guid":{"rendered":"https:\/\/www.iccu.com\/?p=21112"},"modified":"2025-03-14T11:12:38","modified_gmt":"2025-03-14T17:12:38","slug":"how-home-equity-works-and-how-to-spend-it","status":"publish","type":"post","link":"https:\/\/www.iccu.com\/blog\/financial-education\/how-home-equity-works-and-how-to-spend-it\/","title":{"rendered":"How Home Equity Works (and How to Spend It)"},"content":{"rendered":"\n

If you\u2019re a homeowner who has heard the phrase \u2018home equity\u2019 but only kinda sorta knows how it works, you\u2019re not alone \u2026 and you\u2019re likely not capitalizing on your home\u2019s potential. Equity is powerful \u2014 it can help you fund your next major milestone, consolidate debt, and sidestep financial emergencies. But only if you know how to use it.<\/p>\n\n\n\n

Here\u2019s everything you need to know about your home\u2019s equity, and more importantly, how to use it to your advantage.<\/p>\n\n\n\n

Home Equity at a Glance<\/mark><\/h2>\n\n\n\n
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Home equity<\/strong> <\/a>is the money you\u2019d make from selling your house after paying any debts. It\u2019s essentially the part of your home\u2019s value that you\u2019ve already paid off.<\/p>\n\n\n\n

To convert your equity\u2019s value into cash,<\/a><\/strong> you need to take out a loan: a home equity loan, HELOC, or cash-out refinance. Generally, lenders will give you a loan that equals up to 80 percent of your existing equity.<\/p>\n\n\n\n

To get more home equity,<\/a><\/strong> make regular mortgage payments and increase the value of your home (usually through renovations or patience with the housing market \u2013 you pick).<\/p>\n\n\n\n

A home equity loan<\/a><\/strong> transforms your equity into one lump sum with a fixed rate and fixed term. It tends to work best for people who like extra stability or plan on only spending their equity once.<\/p>\n\n\n\n

A HELOC<\/a><\/strong> transforms your equity into a credit balance, which you can spend much like a credit card. You only pay back what you spend, plus interest. It tends to work best for people who prefer flexibility or anticipate making several smaller purchases with their equity over time.<\/p>\n\n\n\n

A cash-out refinance<\/a><\/strong> lets you access your equity by taking out a bigger mortgage with a higher monthly payment. It tends to work best when housing interest rates drop below your mortgage\u2019s current rate.<\/p>\n<\/blockquote>\n\n\n\n

What is home equity?<\/strong><\/h2>\n\n\n\n

Home equity is the potential profit you’d make from selling your house. It’s the difference between the market value of your home and what you still owe on your mortgage. In other words, it’s the part of your home that you actually own.<\/p>\n\n\n\n

Example: <\/strong>You have a home that is valued at $400,000, and you need to pay off $250,000 of your home mortgage. That means you likely have $150,000 in equity.(400,000 – 250,000 = 150,000.)<\/mark><\/em><\/p>\n\n\n\n

As you make payments or your property appreciates, your equity grows, which gives you more potential funds for borrowing or investing.<\/p>\n\n\n\n

\"Home<\/figure>\n\n\n\n

Without a loan, that equity sits untouched and out of reach until you sell your home and buy another. When you do, you can roll the profit you made from the first house (aka your equity) into the second, making your new home cheaper.<\/p>\n\n\n\n

Your equity doesn\u2019t automatically equal cold hard cash, though. To convert that equity into money before you sell your house<\/em>, you need a lender. They\u2019ll use your equity as collateral to give you a loan. <\/p>\n\n\n\n

Because there\u2019s collateral, these loans typically have lower interest rates than, say, a credit card. It also means that if you default on your payments, your home could be on the line.<\/p>\n\n\n\n

Why do I need a loan to access my equity?<\/strong><\/h3>\n\n\n\n

To make this concept a little simpler, let\u2019s pretend your home is an old dresser. (Bear with us here.)<\/p>\n\n\n\n

Say you bought a dresser for $1,000. After refinishing the wood, replacing the hardware, and adding your own artistic flair, you\u2019re confident you can sell the piece for $3,000. Exciting! Of course, you only get that money if you actually sell it.<\/p>\n\n\n\n

But what if you want to access the anticipated $2,000 profit before<\/em> you sell the dresser? Because the profit is only potential money right now, you need someone who\u2019s willing to loan you those funds. If you don\u2019t pay them back, they\u2019re allowed to take the dresser to recoup their loss.<\/p>\n\n\n\n

Now let\u2019s translate this into home terms.<\/strong> Equity is akin to your home\u2019s potential profit. If you want to access that potential money before selling it, you need someone who\u2019s willing to take a risk and loan that money to you now. To make the risk worth it for the lender, they need to know they can use your house as collateral if you don\u2019t pay them back.<\/p>\n\n\n\n

How do I build home equity?<\/strong><\/h2>\n\n\n\n

Equity is a crucial part of homeownership, but it\u2019s one that many don\u2019t consider when creating a financial strategy simply because they don\u2019t know how to make their equity work for them.<\/p>\n\n\n\n

To build equity, use one (or both) of these strategies:<\/p>\n\n\n\n