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Anyone who's sought to buy a home in the past six months has no doubt encountered a challenge -- a glaring lack of inventory that's driven home prices up. But while an uptick in home values is bad for buyers, it's great news for sellers. Not only do they now have the potential to pocket more profit, they also have more options for tapping home equity and borrowing against their properties.
For those not familiar with the term "home equity," it means the portion of a home that's owned outright. A home worth $300,000 with a mortgage balance of $200,000 means its owner has $100,000 worth of equity.
The higher home values trend, the more equity property owners tend to have. In the past year, homeowners with mortgages on their properties have seen equity increase by 10.8%, reports CoreLogic. All told, that's an additional $1 trillion in gained equity, which amounts to an average gain of $17,000 per homeowner. It's also the most substantial equity gain in more than six years.
What can more home equity do for you?
Having more equity in your home is a good thing, because it gives you more borrowing options when you're in a crunch, or simply want money for non-emergency reasons. For example, you can use the equity in your home to pay off other debts, but you can also borrow against it to pay for education, take a vacation, or renovate.
When it comes to tapping your equity, you have a few options.
Home equity loans
With a home equity loan, you borrow a fixed amount and pay it back in installments over time, at a fixed rate. Home equity loans are pretty straightforward, and they typically charge lower interest than what you'd pay on a personal loan.
Home equity lines of credit
With a home equity line of credit, or HELOC, you don't borrow a lump sum off the bat. Rather, you gain access to a line of credit you can draw from as needed. Your draw period is generally pretty lengthy (10 years is common), and you only have to repay the portion of your HELOC you actually borrow. HELOCs also charge relatively low interest, though those rates can be variable, which means your HELOC could, over time, become more expensive to pay back.
With a cash-out refinance, you apply for a new mortgage with a total that is more than your existing home loan balance. The excess loan proceeds are yours to spend as you please. In other words, if you owe $100,000 on your mortgage but have enough equity in your home to qualify for a $150,000 cash-out refinance, you'd get a check for $50,000. Of course, you'd have to pay back that entire $150,000 sum, but given today's refinance rates, it could be your most affordable borrowing option of the lot.
Be careful when tapping your home equity
Borrowing against your home comes with one big danger -- if you go overboard and can't keep up with your repayment schedule, you risk losing your home. That's why you need to proceed with caution with all of the options above. Homeowners gaining equity in their properties is a good thing, but it could open the door to overzealous borrowing and spending, so don't be too quick to put your home equity to work.