What can i do with home equity

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.

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Steps to access equity

• 1

  Calculate the available equity

  Work out the amount of equity available in your property using the estimated market value of your home – commonly based on comparable sales within your area or a real estate agent valuation, less the balance of your current loans secured by the property.

• 2

  Work out the “accessible” equity

  Work out how much money is required to achieve your plans. You may or may not want to – or be able to – access the full amount of equity that’s available, and your servicing capability is an important factor in this discussion. That is, your ability to service any additional repayments may have an impact on the amount of equity that you can access. Say, for example, that you have $150,000 worth of equity in your property. However, the amount of additional repayments you can afford based on your income and expenses works out to be $50,000; then realistically that’s the amount you would proceed to unlock, rather than the full $150,000 that’s available.

  Table 1: Working out accessible equity

  80% of Property Value	Remaining loan amount	Home equity available to access*
  $500,000	$100,000	$400,000
  $600,000	$300,000	$300,000
  $750,000	$400,000	$350,000
  $800,000	$425,000	$375,000
  $900,000	$650,000	$250,000
  $1,000,000	$700,000	$300,000
  $1,250,000	$700,000	$550,000

  *Home equity available to access calculated using 80% of total property value – remaining loan amount

• 3

  Review your loan options

  At this point of the process, you may want to start researching and assessing your home loan options with a Mortgage Choice broker. This is also a good opportunity for your broker to do a “health check” on your current home loan, comparing it based on factors such as interest rates, fees and features against other options from your current lender or other lenders in the market.

• 4

  Work out the costs for accessing equity

  The product you choose and the amount of equity you are looking to access may result in various fees and costs. For example, if you choose to access over 80 percent of your property's value, you will likely need to pay Lenders' Mortgage Insurance (LMI). If you decide to switch to another lender, there may be costs such as fees associated with breaking from a fixed rate product, new loan application fee or government fees.

• 5

  Loan application and settlement

  Once you've decided on a loan option with your Mortgage Choice broker, they'll work with you to get the application process underway and support you at every step to settlement.

Planning to invest? Get your free home loan quote today.

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Common questions

How much equity do I have in my home?

The simple way to know how much equity you have in your home is by calculating the difference between the current property's value and the total remaining balance to pay off on your mortgage.

How to calculate your home equity

Calculate home loan equity by taking your property's current market value and subtracting the remaining loan balance.

Property's market value - Remaining loan balance = Your home equity

For example, if your home is worth $700,000 and there is $300,000 remaining on your home loan, you have home equity worth $400,000.

However, bear in mind that not all of this will be accessible, with lenders only allowing you to borrow 80% of the property's value without being charged for Lender's Mortgage Insurance (LMI).

In other words, to avoid paying LMI, keep your Loan to Valuation Ratio (LVR) below 80%. In this given example, that means:

• 80% of the property's market value = $560,000 (this is the maximum you can borrow without incurring LMI)
• Remaining balance on loan = $300,000 (this is the amount you have already borrowed)
• $560,000 - $300,000 = $260,000

So in this example, the amount of equity you can access without incurring LMI would be $260,000.

Remember, even if you have already paid LMI before, you would still need to pay it again if you try to access equity that exceeds 80% LVR.

How can home loan equity help?

Here's how it works. Let's say you want to buy an investment property with a market value of $400,000. There are also additional purchase costs (legal fees, stamp duty and so on) of $20,000, bringing the total cost to $420,000.

Assuming that you meet the loan approval requirements, a lender will fund 80% of the property’s market value - potentially more if you're prepared to pay Lenders Mortgage Insurance (LMI). That is, the bank will lend you $320,000 to buy the investment property. As the total cost of the property is $420,000 you still need an additional $100,000 for the deposit and other upfront expenses. This can come from the equity in your existing home.

Let's say the market value of your existing home is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000, which is your home equity.

As an investor you can access up to 80% of your home equity (without the need to take out LMI), which equates to $160,000 in this example. Instead of coming up with a cash deposit for the additional $100,000 needed to buy the investment property, you can take this from the $160,000 of accessible equity in your existing home.

The available equity in your home is calculated at 80% of your home (without the need to take out LMI) less any current loans, which equates to $400,000 less $300,000 = $100,000.

Alternatively some lenders will lend up to 95% of the property value less the existing mortgage, where LMI would be paid on the amount borrowed over 80%.

What can Equity be used for?

Other common uses other than buying a home, Equity can also be used toward Home Improvements, Car Loans or a holiday, all at Home Loan interest rates, which can be less expensive than using other forms of credit.

Using Equity to Invest guide

Download our guide on home equity to understand what home equity is and how you could use it to start or expand your investing portfolio.

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