As home prices keep rising so too does the number of homeowners with home equity. While home equity represents valuable savings, it can also be a valuable finance tool, explains CNBC staffer Diana Olick.
Homeowners often tap into the equity to pay for other expenses, like education, home repairs or remodeling – or to pay off other, more expensive debt. Over the course of 2017, the amount of equity borrowers could take out of their homes, or so-called tappable home equity, rose by $735 billion, the largest annual increase by dollar value on record, according to Black Knight. This brought the collective amount nationwide to $5.4 trillion, which is 10% more than at the pre-recession peak in 2005.
Most lenders require homeowners to keep at least 20% equity in their home in order to tap into the equity. The most common ways to do so are through a cash-out refinance or a home equity loan.
For a cash-out refinance, you refinance your current mortgage and take out a bigger mortgage. For example, let's say your home is worth $100,000 and you have a $40,000 mortgage on it. Remember, you have to keep 20 percent in, so $20,000. That means you have $40,000 in equity to tap. You refinance your current mortgage to up to $80,000. Pay off the old loan and have $40,000 left in cash.
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. Home equity loans can be interest only, but after 10 years you have to start paying principal.
How to use your home as a source of cash from CNBC.
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