Tap Into Equity

Tap into equity summary:

• Tap into equity means to borrow money based on your home's equity, or the value of your home minus what you owe the bank.

• When you tap into equity, you use your home's value as security to back up money you borrow.

• There are several ways to tap into equity, including a home equity loan, a home equity line of credit, or a cash-out refinance loan.

Tap into equity definition and meaning

Tap into equity means to access some of the capital you have tied up in your home when it's worth more than your mortgage. Your home's equity is the value of your home minus the amount you owe the bank. 

Let’s say your mortgage balance is $400,000 and your house is worth $500,000. That means you have $100,000 in equity. In other words, you own $100,000 of the value of the home. 

When you tap into equity, you access some of that value, typically by using your home's equity as collateral, or the security that backs up a loan.

Key concept: Accessing capital from your home without having to sell it.

More on tap into equity

Tap into equity doesn’t mean the money is free—you’re taking out a loan or credit line using your home as collateral. That means your home is backing up the loan, and it's on the line if you stop making payments. Tapping into equity could be helpful for big goals like home renovations, education costs, or debt consolidation.

Key attributes of tapping into equity

Here are the key attributes of tapping into equity:

• You have equity in the home. Home equity is the market value of your home minus what you still owe on the mortgage. Most lenders don't allow you to borrow up to the full value of your house. Typically, lenders prefer the loans against your home add up to 80% of its value or less. Some lenders may have different requirements.

• You use a loan to tap into your home's equity. Home equity loans allow you to borrow against the value of your home. You can access some of the money that’s tied up in your house by using it as collateral for a loan. You still need to meet the lender's requirements to qualify for a loan.

• Tapping equity could be an affordable way to borrow. Home equity loans tend to have lower interest rates than other types of credit. That's because using your home as collateral makes the loan less risky for the lender. If you don't repay the loan, the lender could take your house instead.

• Tapping equity has some risk. Since you're putting your home on the line to secure the loan, you could risk losing the house if you don't pay your debt.

Reasons to tap into equity

People tap into equity for many reasons, including:

• Consolidate debt. If you have high-interest credit card debt, tapping into equity could help you reduce the costs of repayment. If you qualify, you could take a home equity loan at a lower rate to consolidate and refinance your current debt. You'd have one loan to pay instead of several, and your monthly interest costs could be lower. 

• Fund home improvements. You could borrow against the equity in your home to pay for home repairs or renovations. Home repairs and renovations may increase the value of your home, which could increase your equity over time. When you use a home equity loan for home improvements or repairs, the interest on the loan may be tax-deductible. 

• Pay for big purchases. If you must pay for an expensive purchase, tapping home equity is one option. However, you'll want to be sure the purchase is an important one. For example, you could tap into equity to pay for education costs to change or advance your career. 

Types of loans that tap into equity

You have a few options to tap into your home's equity, including:

• Home equity loan. Also called a second mortgage, a home equity loan lets you borrow against the equity in your house. The funds are deposited as a lump sum, and your current mortgage isn't affected.

• Home equity line of credit (HELOC). You get access to a line of credit secured by your equity. You can borrow money, repay, and borrow again, up to the maximum credit limit, as much as you need during the draw period. 

• Cash-out refinance. You take out a new loan with new terms and an amount that's larger than what you owe on your existing mortgage loan. You use the money from the new loan to pay off your existing mortgage in full, and you get the extra as a lump sum at closing.