How to use your home equity
Quick insights
- A home equity line of credit (HELOC) can fund home renovations, consolidate high-interest debts, cover educational expenses and fund investments.
- Home equity is the portion of your home’s value that you own outright. You find this by subtracting your remaining mortgage balance from your home’s current value.
- You may be able to access your home equity through a HELOC, home equity loan or cash-out refinance, depending on your goals.
A home equity line of credit (HELOC) is a flexible way to borrow money using the equity in your home. Whether you want to upgrade your living space, consolidate debt, or seize an investment opportunity, a HELOC can help turn your goals into reality. This guide covers how to use a HELOC and what you need to know before applying.
What is home equity?
Home equity is the current market value of your home minus the amount you still owe on your mortgage. Your equity can increase as you pay your mortgage and the value of your home grows.
For example, if your home is worth $300,000, and your remaining mortgage balance is $200,000, you would have $100,000 in home equity.
Depending on the amount, your home equity can be a valuable financial resource. There are several ways you may be able to access it, including:
- HELOC: Access funds as needed.
- Home equity loan: Receive a lump sum of money.
- Cash-out refinance: Replace your mortgage and receive cash from the equity.
What are the differences between a HELOC, home equity loan, and cash-out refinance?
Each option offers a unique way to access your home’s value, so choosing one depends on your specific financial needs. Let’s explore these options.
HELOC
A HELOC is a revolving line of credit secured by your home. As with a credit card, you can borrow funds as needed up to your approved credit limit during the draw period and typically only pay interest on the amount you’ve borrowed.
Example: You qualify for a $75,000 HELOC but initially draw only $15,000 to remodel your kitchen, leaving the remaining funds available if needed. During the draw period (which may last 5 to 10 years), you will typically make payments based on the $15,000 you’ve borrowed rather than the full $75,000 credit limit.
Good for: Ongoing or unpredictable expenses, such as home renovation projects completed in phases, emergency repair expenses or situations when you don’t need all the funds at once.
Home equity loan
A home equity loan allows you to borrow a lump sum of money against your available home equity. These loans often come with fixed interest rates and predictable monthly payments.
Example: You borrow a $40,000 home equity loan to pay off different loans or credit card balances and receive the full amount upfront. You can use it to pay off various debts and then repay the home equity loan—consolidating bills as a result.
Good for: Large, one-time expenses when you know exactly how much you need to borrow, such as a major home improvement project, debt consolidation or a large purchase.
Cash-out refinance
A cash-out refinance replaces your existing mortgage with a new, larger one. You receive the difference between your old balance and the new loan amount in cash. This creates a completely new mortgage with new loan terms and a new interest rate.
Example: You owe $200,000 on your mortgage and refinance into a new $250,000 loan, receiving $50,000 in cash (minus closing costs).
Good for: Homeowners who want to access equity while potentially changing their mortgage term or securing a more favorable mortgage rate than their current loan.
How to calculate your home equity
To calculate your home equity, determine the current estimated value of your home and subtract your remaining mortgage balance.
Here’s the formula:
Home Equity = Current Home Value – Remaining Mortgage Balance
Keep in mind that mortgage lenders typically won’t allow you to borrow the full amount of your equity. To manage risk, lenders may require you to keep some equity, such as 20%, after the equity is accessed. Whether it’s a HELOC, home equity loan or cash-out refinance, the amount you can leverage will depend on factors like your available equity, credit profile, income and lender requirements.
6 ways to use a HELOC
A HELOC can offer you a flexible source of money that you repay with variable interest. Here are examples of how a HELOC can be used.
1. Home renovations
Improve or expand your living space. For instance, if you use a HELOC to remodel a kitchen or add a new deck, you may increase your home’s value and resale potential. Plus, given the average length of HELOC draw periods, you may be able to fund long-term projects.
2. Debt consolidation
You may use a HELOC to consolidate debt. Paying off balances could streamline them into one payment. Compared to credit cards, HELOCs generally have lower interest rates, so you could potentially save on interest, not just simplify payments.
3. Education expenses
Whether it’s tuition or other educational needs, you can draw from a HELOC up to your limit during the draw period. This may create an alternative to student loans for yourself or a child.
4. Emergency funds
When unplanned expenses arise, such as home or car repairs, an open HELOC may provide an answer. The terms of a HELOC may be more favorable than other forms of debt, such as credit cards and personal loans.
5. Big-ticket purchases
A HELOC can help cover large expenses that don’t fit neatly into a monthly budget—from major life events to large purchases, such as weddings, new cars or adoption expenses. HELOCs often have lower interest rates than some forms of unsecured borrowing. Therefore, a HELOC may be an answer for a planned expense.
6. Investment opportunities
A HELOC can be used to fund investment options, potentially offering higher returns than the cost of borrowing. You could use a HELOC to purchase a rental property or invest in the stock market, for example. However, investment opportunities carry unique levels of risk.
The versatility of a HELOC
Key aspects of a HELOC that make it a flexible financial product include:
- How you borrow: Accessing a HELOC is similar to using a credit card. You can draw from the credit line, repay and borrow again during the draw period. That can last 3–10 years or more, depending on the lender.
- Variable interest: Having a variable interest rate on a HELOC means the rate can change over time with the market. With any change in your rate, your monthly payments can also change.
- Usage: You can use a HELOC for various purposes, as described above. Debt consolidation, home renovations and emergency funds are among the different ways to use a HELOC. This versatility can be beneficial depending on your situation and needs.
Remember, your home serves as collateral for the loan, so borrowing should align with your budget and repayment goals.
Understanding the limitations of a HELOC
A HELOC can be a flexible way to access equity in your home, but it isn’t the right fit for every financial situation. Many HELOCs have variable interest rates, so your monthly payment could change over time as rates rise or fall. When it comes to repayment, monthly amounts may increase once the draw period ends and principal repayment begins. Before taking out a HELOC, evaluate your budget, income stability and long-term financial goals.
Is there anything you can't use a HELOC for?
Besides how you draw from your HELOC, the main limit on your usage is the available credit. Because it’s a form of revolving credit, you could use a HELOC in different ways. However, a HELOC may not be an ideal debt to take on in certain situations. It typically involves variable monthly payments and long repayment periods.
In summary
A HELOC can be a flexible loan option that allows you to tap into your home equity. The use cases span various needs, like home improvements, debt consolidation, education costs or other big-ticket items. Before moving forward, it’s important to understand how your available equity, loan terms and repayment structure can impact your monthly budget over time.
If you’re exploring loan options, Chase offers both HELOC and cash-out refinance solutions. These may help you access equity in different ways. Consider reaching out to a Home Lending Advisor today.
