When you own a home, the mortgage payments that you make every month allow you to build up equity, which is the amount of the home that you have full ownership over. The remaining balance represents your mortgage, which is typically paid off over the course of 15-30 years.

The total amount of equity that’s in your home will increase with each payment you make, which allows you to effectively build wealth. Eventually, you have the option to convert your equity into cash that can be used to pay for remodeling your home or covering other significant financial needs. These days, equity-rich Americans are starting to put their homes to work by tapping into their equity.

How Current Market Conditions Have Increased Equity

The economic conditions that have persisted over the past few years have caused many Americans to build up a considerable amount of equity in their homes. When homeowners want to get cash out, many of them are choosing to use home equity loans to pay off their credit cards and other high-interest debt. A smaller percentage are using this money to make improvements to their homes.

The higher costs brought about by inflation are causing homeowners to more readily consider using the equity they’ve already built up. Consolidating debt makes it easier for homeowners to afford the higher costs on eggs, gas, and milk. In Q4 2022, credit card debt spiked by more than 18% when compared to the same time in the previous year, which follows several quarters of similar increases.

The average amount of equity that owners have in homes is just under $300,000, which indicates that owners are making consistent monthly payments. In Q3, U.S. homeowners gained around $34,000 of equity. Even though these numbers have dropped when compared to Q2, they still indicate that homeowners are quickly building equity that they can then access when prices and expenses start to increase.

Equity is known to fluctuate alongside the market. When real estate values rise, equity will also rise. The same is true when property owners pay down the mortgage principal they have. For the majority of individuals, building equity is the main technique they use to accumulate wealth. However, when the economy gets worse, it’s possible for real estate values to decrease as well, which results in equity dropping.

How to Use Equity

Homeowners don’t need a high amount of equity before they’re able to use it. There are three primary options available to you when you decide to tap into your home equity. You can take out a fixed-rate second mortgage, which is a home equity loan that allows you to receive the equity in your home as a lump sum that can be used to pay for practically anything.

You could also choose to refinance your initial mortgage to obtain a larger amount. Along with a lower interest rate, you’ll benefit from gaining access to funds that can be used to pay down debt or make improvements to your home. The third solution involves creating a home equity line of credit (HELOC). This line of credit is available to you for a set period of time, during which you can take out money whenever you need to make a payment. A line of credit is similar to a credit card.

For people who already have a low-rate mortgage, home equity loans and HELOCs are more advantageous when compared to refinance loans. In Q3, home equity loan originations rose by more than 4%. Lenders also originated over 800,000 HELOC loans in the initial two quarters of 2022. Keep in mind that a HELOC can be approved without needing to obtain an appraisal on your home or verify your income.

What to Avoid

While an increasing percentage of homeowners are taking advantage of the equity in their homes, there are some concerns that you should keep in mind if you want to avoid issues with this option. In the event that you use your home equity to pay down any outstanding debt, it’s highly recommended that you avoid increasing your credit card debt immediately afterwards. You’ll end up in the same position as before but without access to equity.

You should also avoid spending equity in a frivolous manner. Having access to equity provides you with financial stability. Whether you want this equity to support you during retirement or provide for your heirs, you might regret spending the equity on things you don’t need.

If you’ve been building equity in your home, there are several ways that you can benefit from borrowing against your equity. You can pay down debt, go on a vacation, or make smart renovations to your home. Speak with your lender to determine if a home equity loan, refinance, or HELOC is right for you.