What is home equity?

In an economic climate plagued by decades-high inflation and uneven stock market performance, millions of Americans may find themselves looking for new and innovative ways to make ends meet. This can take the form of everything from passive income streams to refinancing to relying on traditional credit forms like credit cards or personal loans. 

Homeowners have a unique alternative to pursue: their own homes. Or, specifically, the equity they've built up during their time in the home. In this article, we will break down what home equity is, how to calculate it and how you can use those funds via a home equity loan or a home equity line of credit (HELOC).

Explore your home equity loan options online now to see if a home equity loan or HELOC is right for you.

What is home equity?

Simply put, home equity is the amount of money you currently have invested in your home. It's a combination of the number of payments you've made toward your mortgage principal and the value of your home on the current market. 

Let's say you initially purchased your home for $500,000 but have made enough payments that you now owe $400,000. While you've been paying your mortgage, your home's value has increased from $500,000 to $600,000. In this case, you have $200,000 worth of home equity ($100,000 you've paid off of the mortgage loan plus the $100,000 your home has grown in value).

That said, home equity doesn't always add up favorably. In some instances, you may have paid your mortgage down, but the value of the home dropped during the same period. In these instances, the only equity you can use is from the payments you've made (since there isn't any new value). 

A real estate professional or lending institution can set up a formal appraisal of your home to accurately determine how much equity you currently have.

How can you use your home equity?

If you're one of the millions of homeowners who have seen their property rise in value in recent months or years, chances are high that you're sitting on a significant amount of home equity. You can use it in multiple ways to help pay for expenses. Here are two primary ones to know:

Home equity loans

Home equity loans act as a second mortgage. Homeowners simply deduct a portion of the equity they have in their homes to use as they see fit. Home equity loans have multiple advantages, namely their lower interest rate and interest tax deduction eligibility if used for IRS-approved home repairs and improvements. 

Explore your home equity loan options here now.

HELOCs

HELOCs work similarly to home equity loans, but instead of getting a large sum of money at one time, a HELOC acts more as a credit card. It's a revolving line of credit to be used as the homeowner sees appropriate. HELOCs also have lower interest rates than credit cards or personal loans, and they're also tax-deductible if used correctly.

They're generally divided into two periods: a draw period when you borrow as much as you want or need (usually limited to 85% of your home's equity) and a repayment period when you won't be able to borrow any more money and must pay back what you've borrowed.

Explore your HELOC options here now.

The bottom line

Homeowners looking for ways to pay for rising expenses should strongly consider turning to their homes - and the equity they've built up - as a low-interest credit alternative. Home equity can be used in multiple ways, including with a home equity loan or a HELOC. And if used for eligible reasons, the interest the homeowner pays on these credit forms may be tax-deductible for the year it was used.