What is considered equity in a home

Mortgage equity is the difference between what you owe on your mortgage and the current value of your property. 

In simple terms, equity is how much of your home that you “own”. It’s the amount that you’ve paid off your mortgage, plus how much you paid for your deposit. 

If the value of your home has gone up then your equity also includes the difference between the price you bought it for and its new value.

While you’re paying off your mortgage, you’re building up equity. Every monthly repayment you make helps increase the equity in your home. 

Most lenders require your CLTV ratio to be below 85 percent (though that number may be lower or vary from lender to lender) to qualify for a home equity line of credit. However, your home’s value can fluctuate over time so if the value drops, you may not be eligible for a home equity loan or line of credit, or you may end up owing more than your home is worth.

There are several ways you can get access to your home equity, whether through a cash-out refinance or home equity loan, home equity line of credit or reverse mortgage.

Cash-Out Refinance

A cash-out refinance allows you to take out your equity by getting a new mortgage with a higher loan amount. You replace your current mortgage with a bigger one and get the difference in cash. Like with any refinance, your new mortgage pays off your old one, so you just have one monthly mortgage payment. It generally takes between 30 and 45 days to refinance.

When you do a cash-out refinance, you usually need to leave some equity in the home. The amount you’ll have to leave in depends on the type of loan you’re seeking, but you should expect to leave about 20% equity in the home. 

For example, let’s say your home is worth $200,000 and you owe $100,000 on your mortgage. To take cash out, you need to leave 20% equity ($40,000) in the home. If you were to refinance your home with a new loan amount of $160,000, you’d get to pocket $60,000, minus closing costs and fees.

You can use the money from a cash-out refinance for anything you want. The money is tax-free, and there are no restrictions on how you can use it.

Home Equity Loan

A home equity loan is a second mortgage on your home. It doesn’t replace your current mortgage; instead, it’s a second mortgage that requires a separate payment. For this reason, home equity loans tend to have higher interest rates than first mortgages.

Like a cash-out refinance, a home equity loan is a secured loan that uses your home equity as collateral. This gives you access to lower interest rates than unsecured loans, like personal loans.

Once you close on your home equity loan, you’ll receive a lump sum payment from your lender, which you’ll make payments on over a predefined loan term.

Lenders rarely allow you to borrow 100% of your home’s equity for a home equity loan. The maximum amount you can borrow varies depending on the lender but is typically between 75% and 90% of the value of the home. Rocket Mortgage® is now offering The Home Equity Loan, which is available for primary and secondary homes.

Home Equity Line Of Credit (HELOC)

A home equity line of credit (HELOC) is also a second mortgage on your home. The main difference is that a HELOC gives you a line of credit that you can draw from when you need it. The credit limit corresponds to the amount of equity you have in your home.

You can withdraw HELOC funds at any time during the draw period defined by your lender. Most draw periods are between 5 and 25 years. HELOCs may have a minimum monthly payment due (similar to a credit card), or you may need to pay off the accrued interest each month. At the end of the draw period, you’ll need to repay the full amount borrowed.

Interest rates on HELOCs are usually based on an index instead of a fixed rate. There are usually no limits on the amount the interest can increase each period. If you choose a HELOC versus a cash-out refinance, make sure you carefully monitor your spending and interest accumulation. Rocket Mortgage does not offer home equity lines of credit at this time.

Reverse Mortgage

If you’re over the age of 62 and would like to boost your retirement savings, you may want to consider a reverse mortgage. There’s no monthly mortgage payment with a reverse mortgage, though you must still pay taxes and insurance.

With a reverse mortgage, your loan amount is based on the amount of equity you have in your home. If you have an existing mortgage, the proceeds of the loan are used to pay that off. The rest is available for you to use as you see fit.

There are different types of reverse mortgages that offer the proceeds from a reverse mortgage  in several ways:

• As a lump sum of cash at closing, as with a proprietary reverse mortgage
• Through monthly payments that you’ll get as long as you live in your home
• Through monthly payments for a fixed period of time
• Through a line of credit that you can draw on at any time

A reverse mortgage can be a good choice for homeowners who plan to stay in their home indefinitely and aren’t worried about leaving an inheritance. It can give you cash in retirement if you don’t have anywhere else to get it. Rocket Mortgage does not offer reverse mortgages at this time.

How is equity calculated on a home?

How much equity can I access in my home?