How to Use Home Equity for Your Financial Goals in Life

Homeownership is not just about having a place to live; it’s also about building equity and learning how to use that home equity for your financial goals in life.

Your home equity, representing the portion of your home that you truly own, can be a valuable financial resource.

Whether you’re looking to pay for:

• A major life event, like a wedding or vacation
• Consolidate debt
• Unexpected medical expenses
• Education
• Business investment
• The downpayment for another property or
• Any other worthwhile expense

Understanding how to use your home equity can help you realize your personal and financial goals.

This article will guide you through using your home equity, including the different types of mortgage refinance options.

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What is home equity?

Home equity is the difference between the amount of money your home is worth—its ‘market value’—and how much you still owe on your mortgage.

As you make mortgage payments, your lender’s interest in the property decreases, and your equity increases.

 Additionally, if your home appreciates, your equity will grow even further.

How can you use your home equity?

Home equity can give you the funds needed to achieve various financial goals.

Here are some common ways homeowners use their equity:

• Home improvements: Investing in renovations can increase your home’s value and improve your quality of life
• Debt consolidation: Using your home equity to pay credit card balances or other high-interest debts can save you money in the long run
• Education expenses: Financing college tuition for yourself or your children using home equity can be a strategic move
• Emergency expenses: Access to funds for unexpected medical bills or other emergencies can provide peace of mind
• Investment opportunities: Using your equity to invest in a second property or other ventures can help diversify your portfolio

What is a cash-out refinance?

A cash-out refinance happens when you swap your existing mortgage for a new, larger home loan. The difference between your old loan balance and the new amount is given to you as cash.

This can be a useful way to leverage your equity if you need a significant amount of money and prefer a single mortgage payment.

Benefits of cash-out refinance

• Access to large sums of money: Allows you to tap into a substantial amount of your equity
• Potential for reduced interest rates: Depending on market conditions, you might secure a lower interest rate than your original mortgage
• Single monthly payment: Simplifies your finances by consolidating your debt into one monthly mortgage payment

Considerations and risks

• Reduced equity: Taking out equity reduces your ownership stake in the home
• Risk of foreclosure: Failure to make payments can lead to foreclosure since your home is the collateral
• Closing costs: Refinancing comes with costs that must be factored into your decision
• Loan terms: New terms may include prepayment penalties or other conditions

Do I qualify for a refinance loan?

Before you can leverage your home equity, you must determine if you qualify for a refinance loan.

The following are some key factors lenders consider.

Credit score

Your credit score is very important when it comes to qualifying for a refinance loan. While minimum score requirements vary, a higher credit score typically offers better loan terms.

Debt-to-income ratio (DTI)

Lenders evaluate your DTI ratio— your monthly debt payments divided by your gross monthly income—to help determine your creditworthiness.

A DTI ratio of under 43% is generally preferred.

Ensuring you have enough consistent income to cover the new mortgage payments is essential for approval.

Home equity

The amount of equity you have in your home affects how much you can borrow.

The loan-to-value (LTV) ratio—the percentage of your home’s value you owe on your mortgage, should typically be 80% or lower.

However, some refinance options allow for higher LTV ratios, depending on the loan type.

How to calculate your home’s value

A professional home appraisal is the most accurate method for determining your home’s value. Lenders often require this as part of the refinance process.

To calculate your equity, subtract your current mortgage balance from your home’s estimated value. Then, divide this difference by your home’s value to find your LTV ratio.

Use free online tools to get an estimate of your home’s value.

Types of mortgage refinance

Various mortgage refinance options are available, each with its own advantages and prerequisites.

Let’s look at the primary types.

Conventional refinance

Features:

• Most common type of loan for homeowners
• Borrow up to 80% of your home’s value
• No out-of-pocket closing cost option
• Choice between fixed or adjustable-rate mortgages

Requirements:

• Varying credit score requirements, typically, higher scores get better terms
• DTI ratios should ideally be lower for better loan terms
• Maximum LTV ratio of 80%
• Documented income to show ability to repay the loan
• Private mortgage insurance (PMI) required if equity is less than 20%

FHA refinance

Features:

• Available even if your current loan is not an FHA loan
• Borrow up to 80% of your home’s value
• No out-of-pocket closing cost option
• Choice between fixed or adjustable-rate mortgages

Requirements:

• Flexible credit score requirements
• DTI ratios can vary, but lower ratios are preferred
• Maximum LTV ratio of 85%
• Home must be your primary residence
• Requires a home appraisal
• Ongoing monthly mortgage insurance payments
• Upfront mortgage insurance premium 

MyPerfectMortgage.com can help you reach your financial goals

At MyPerfectMortgage.com, we’re dedicated to helping you find the best lenders to help you leverage your home equity.

We aim to connect you with trusted lenders who can provide personalized assistance throughout the refinancing process, ensuring you understand your options and feel confident in your decisions.

Whether you opt for a cash-out refinance or aim to lower your monthly payments, understanding your options and working with experienced professionals can make the process seamless.

If you’re ready to apply or have more questions about how to use home equity, let MyPerfectMortgage.com match you with the right lender for your specific situation.