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Best Ways To Tap Your Home Equity – Forbes

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For most homeowners, the last few years have bee…….

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

For most homeowners, the last few years have been a gold rush. Home prices have spiked, helping homeowners gain more than $55,000 in their home equity on average in just a year alone, between the fourth quarters of 2020 and 2021.

Overall,  $3.2 trillion was added in total equity nationwide during the same period, representing a 29% jump year-over-year, according to CoreLogic, a real estate data analytics company.

Though many homeowners are flush with equity, it remains locked in their house until the owner sells the home or taps their equity through a cash-out refinance, or obtains a home equity financial product such as a home equity line of credit (HELOC) or a home equity loan. Here are some of the most common ways to tap your home equity while your home is worth more.

How to Use Equity in Your Home

The most popular ways to access your home equity without selling the home are: Cash-out refinance, a HELOC or a home equity loan. All three work in different ways and have a different time period for when you receive the funding.

Keep in mind, these are financial products that help you tap your home equity for many needs—like remodeling your home or paying for a child’s college costs. However, you’ll still have to pay it back over time or via a lump sum if you sell your home.

How a Cash-out Refinance Works

Cash-out refinancing allows you to access your home equity through a first mortgage instead of a second mortgage, like a home equity loan or line of credit. It essentially replaces your current mortgage.

Generally, you’ll need to have 20% equity left in the home after refinancing; however, some lenders will let you dip below that 20% equity minimum, but you may have to pay for private mortgage insurance (PMI) on the new loan if you do.

Cash-out refinances replace your existing mortgage, so the terms will change. You can shorten or lengthen the amount of time you have to repay your new mortgage. Be sure to factor in closing costs, which can range from 2% to 5% of the new loan amount.

How a HELOC Works

HELOCs function more like a credit card, where the lender extends a line of credit for an amount based on the equity in your home. Then you can access those funds as needed, instead of getting a lump-sum payment. Borrowers can use what they need and once they pay off the balance, the loan is over.

How much credit you get largely depends …….

Source: https://www.forbes.com/advisor/home-equity/best-ways-tap-home-equity/

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