As a homeowner, you may be wondering, "How much equity can I borrow from my home?" especially now that mortgage rates are starting to shift. In fact, applications to refinance a home loan surged by 20% last week compared to the previous week. This surge in demand for refinancing is a staggering 175% higher than the same week last year, as the average contract interest rate for 30-year fixed-rate mortgages dipped to 6.13%. For context, this rate was 7.41% at this time last year.
With mortgage rates falling for the eighth straight week, more homeowners are exploring ways to tap into their home equity.
The refinance share of applications now accounts for 55.7% of total mortgage demand, signaling that more people see the value in cashing out some of their home’s equity.
What Are Your Home Equity Borrowing Options?
There are three common ways to access your home’s equity:
1. Home Equity Loan: A home equity loan allows you to borrow a lump sum of money upfront, which is paid back in fixed monthly payments. It’s often used for one-time expenses such as home renovations or debt consolidation.
2. Home Equity Line of Credit (HELOC): A HELOC works like a credit card secured by your home. You can borrow money as needed during a draw period and only pay interest on the amount you use. This is a flexible option for ongoing expenses or projects.
3. Cash-Out Refinance: With a cash-out refinance, you replace your current mortgage with a new, larger loan. The difference between your new loan amount and your remaining mortgage balance is given to you in cash. This can be a smart choice if you want to lock in a lower interest rate while accessing your equity.
How Much Equity Can You Borrow?
Estimating how much equity you can borrow is straightforward:
1. Estimate Your Home’s Value: Use an online home value estimator or look at recent sales in your neighborhood for a rough idea. For the most accurate result, you'll need a professional appraisal.
2. Subtract Your Outstanding Mortgage Balance: Check your mortgage statement to find out how much you still owe. The difference between your home’s current value and your mortgage balance is your available equity. Typically, you can borrow between 80% and 85% of your home’s value, minus the amount you still owe on your mortgage.
For example: - If your home is valued at $500,000 and you owe $300,000, your available equity is $200,000. If you can borrow up to 80% of your home’s value, you could access up to $100,000 in equity.
Note that some highly qualified borrowers may be able to borrow up to 90%. Take to your mortgage advisor for more information.
Factors That Affect How Much You Can Borrow
Aside from the value of your home, other factors also affect how much you can borrow, including:
- Credit Score: A higher credit score typically allows for better borrowing terms and higher loan amounts.
- Debt-to-Income Ratio: It's important to demonstrate that you can comfortably manage new debt payments along with your current financial obligations.
- Home’s Location: The local housing market plays a role in how much equity you can access. If your neighborhood is in high demand or experiencing growth, your home may appraise for more, increasing your available equity.
Next Steps
If you're considering tapping into your home equity, the current low mortgage rates make it an attractive option. However, it's crucial to carefully assess your needs and long-term financial goals before borrowing against your home.
Reach out to us, your local mortgage professional, for personalized advice and to explore the best options for your situation. We can guide you through the process and ensure you make the most of your home’s equity, helping you turn this valuable asset into a strategic financial tool.