If you own a home in the Phoenix area, you may be sitting on a gold mine.
Home equity is the difference between the value of your home and the amount you
owe on your mortgage. According to Zillow, the median home value in Phoenix rose
by 28.4% in the past year, reaching $377,300 in September 2023. This means you
may have gained a lot of equity in your home without even realizing it.
But how can you use your home equity to boost your finances? Here are five
ways you can tap into your home equity and make the most of it.
1. Home Equity Loan
A home equity loan is a lump-sum loan that you repay over a fixed term,
usually 10 to 15 years. You can use a home equity loan for any purpose, such as
consolidating debt, paying for college, or making home improvements. The
interest rate on a home equity loan is typically lower than other types of
loans, and the interest may be tax-deductible if you use the loan to buy, build,
or improve your home.
To qualify for a home equity loan, you need to have enough equity in your
home, a good credit score, and a stable income. The maximum loan amount depends
on your lender and your loan-to-value (LTV) ratio, which is the percentage of
your home’s value that you owe on your mortgage. Some lenders may let you borrow
up to 90% of your home’s value, while others may cap it at 80%.
2. Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, is a revolving line of credit that
you can access as needed, up to a certain limit. You only pay interest on the
amount you use, and you can repay and reuse your credit line as often as you
want during the draw period, which is usually 10 years. After the draw period
ends, you enter the repayment period, which is usually another 10 to 20 years,
where you pay off the principal and interest on your balance.
A HELOC is similar to a credit card, but with a lower interest rate and a
higher credit limit. You can use a HELOC for any purpose, such as covering
emergency expenses, funding a vacation, or starting a business. The interest on
a HELOC may also be tax-deductible if you use it to buy, build, or improve your
home.
To qualify for a HELOC, you need to have enough equity in your home, a good
credit score, and a stable income. The maximum credit limit depends on your
lender and your LTV ratio. Some lenders may let you access up to 90% of your
home’s value, while others may limit it to 80%.
3. Cash-Out Refinance
A cash-out refinance is a way to replace your existing mortgage with a new
one that has a higher loan amount. You can use the difference between the old
and new loan amounts to get cash, which you can use for any purpose. For
example, if you owe $200,000 on your mortgage and your home is worth $300,000,
you can refinance your loan for $250,000 and get $50,000 in cash.
A cash-out refinance can help you lower your interest rate, extend your loan
term, or switch from an adjustable-rate to a fixed-rate mortgage. The interest
on a cash-out refinance may also be tax-deductible if you use the cash to buy,
build, or improve your home.
To qualify for a cash-out refinance, you need to have enough equity in your
home, a good credit score, and a stable income. The maximum loan amount depends
on your lender and your LTV ratio. Some lenders may let you borrow up to 90% of
your home’s value, while others may limit it to 80%.
4. Reverse Mortgage
A reverse mortgage is a type of loan that allows you to convert some of your
home equity into cash, without having to sell your home or make monthly
payments. Instead, the lender pays you either a lump sum, a monthly income, a
line of credit, or a combination of these options. You can use the money for any
purpose, such as supplementing your retirement income, paying for medical bills,
or covering living expenses.
A reverse mortgage is different from a regular mortgage because you don’t
have to repay the loan until you die, sell your home, or move out permanently.
The loan balance grows over time, as the interest and fees are added to the
principal. The loan is repaid from the proceeds of the sale of your home, or by
your heirs or estate. If the loan balance exceeds the home value, you or your
heirs are not responsible for the difference, as long as you meet the loan
obligations, such as paying property taxes, homeowners insurance, and
maintenance costs.
To qualify for a reverse mortgage, you need to be at least 62 years old, own
your home outright or have a small mortgage balance, live in your home as your
primary residence, and have enough income to pay the loan obligations. The
maximum loan amount depends on your age, your home value, the interest rate, and
the loan fees. The most common type of reverse mortgage is the Home Equity
Conversion Mortgage (HECM), which is insured by the Federal Housing
Administration (FHA) and has a limit of $822,375 in 2023.
5. Home Equity Sharing
Home equity sharing is a way to sell a portion of your home equity to an
investor, in exchange for cash. You can use the cash for any purpose, such as
paying off debt, investing in other assets, or starting a business. You retain
the ownership and control of your home, and you can continue to live in it as
long as you want.
Home equity sharing is different from a regular sale because you don’t have
to move out of your home or pay any monthly payments. Instead, you agree to
share the future appreciation or depreciation of your home with the investor,
based on the percentage of equity you sold. For example, if you sell 20% of your
home equity for $50,000 and your home value increases by $100,000 in 10 years,
you will owe the investor $70,000 when you sell your home or buy back their
share. If your home value decreases by $100,000 in 10 years, you will owe the
investor $30,000.
To qualify for home equity sharing, you need to have enough equity in your
home, a good credit score, and a stable income. The maximum equity you can sell
depends on your lender and your LTV ratio. Some lenders may let you sell up to
50% of your home equity, while others may limit it to 30%.
Conclusion
Home equity is a valuable asset that you can use to improve your financial
situation. Whether you need cash for a specific purpose, or you want to
diversify your portfolio, there are many ways to unlock your home equity and
make it work for you. However, each option has its pros and cons, and you should
carefully weigh the benefits and risks before making a decision. Consult a
financial advisor, a tax professional, and a licensed REALTOR to help you choose
the best option for your needs and goals.
