Leverage

Leverage summary: 

• Leverage has several meanings, but in finance, it's something that you use strategically to realize a goal. 

• If you have home equity, you could leverage it to get a home equity loan or line of credit (HELOC). 

• Outside of finance, leverage can mean using influence or connections in a strategic way.

Leverage definition and meaning

Leverage means to use something that you have to realize a specific goal or purpose. For example, if you have some equity built up in your home—if it's worth more than you owe—that may give you leverage to borrow money. You could use the home as collateral (security) for a home equity loan or HELOC. 

People leverage their homes to borrow because there's usually some kind of return on investment (ROI) in it. For example, you might leverage your equity to get a $50,000 home equity loan to remodel. If your home increases in value more than the cost of the loan, you have a positive ROI.

Key concept: You could leverage your home equity to qualify for a loan. 

More on leverage

If you own a home, your equity could be a great source of leverage to reach financial goals. Home equity is the difference between what you owe on the mortgage and what your home is worth (according to a professional appraisal). 

When you have equity, you have leverage for a loan. Home equity loans and HELOCs use your home as collateral, which means your home backs up the loan. If you don't repay it, the bank could sell your home to cover its losses To get a home equity loan, you need to meet income, credit, and equity requirements set by the lender.

Still not sure how leverage works? Let's take a deeper dive. 

Leverage: a comprehensive breakdown

Leverage has different meanings depending on the situation. To keep it simple, we'll stick to discussing leverage in a financial sense. 

When you have leverage, you could use it to borrow money. Leveraging your equity means borrowing against your home, using the property itself as collateral. Collateral is something of value that you own that's used to secure a loan. 

Essentially, leverage is a tool. It can help you reach an end goal.

So, why would you leverage your home equity to get a loan? You might access your equity if you need cash for:

• Home repairs or improvements

• Emergency expenses

• Debt consolidation

• Medical bills

• Education expenses

The upside of leveraging home equity is that you can decide how to use the money you borrow. 

Ways to leverage home equity

There are three main ways you could leverage equity:

• Home equity loan. A home equity loan lets you borrow a lump sum and repay it over time, with interest. Home equity loans usually have fixed interest rates. 

• HELOC. A HELOC or home equity line of credit is a flexible credit line you can withdraw from as needed. HELOCs typically have variable interest rates. Achieve offers fixed-rate HELOCs. 

• Cash-out refinance. A cash-out refinance replaces your existing mortgage with a new, larger mortgage loan. You pay off your existing loan and keep the extra money for your other financial goals.

All three strategies use your home as collateral. They differ when it comes to interest rates, fees, and repayment terms. 

Leverage pros and cons

Leverage has its benefits. For example:

• You may be able to borrow significantly more than you would with a credit card or personal loan. 

• Home equity loans typically have longer repayment terms than personal loans, so your payments might be lower. 

• The interest rates may be lower than credit cards. 

• You could choose terms that fit your budget. 

Are there downsides to leveraging your equity? Yes, and the risks should be noted. 

• Since your home secures the loan, you risk losing it if you fail to keep up with the payments. 

• Getting a home equity loan shrinks your equity, which could put you at risk of becoming underwater (owing more than your home is worth). 

• High interest rates, fees, or longer repayment terms could make borrowing more expensive. 

• It may be harder to qualify for a home equity loan with poor credit. 

Weighing both sides could help you decide if it makes sense to leverage your equity, and how to do it. If you decide to leverage your equity with a home equity loan, shop around to compare rates and terms.