Homeowners Gained $1 Trillion in Equity. How Can You Tap Into It?

Home equity piled up in 2022

Despite a slowing pace of housing value growth, borrowers made huge home equity gains in 2022.

Homeowners with mortgages saw a collective annual equity increase of $1 trillion in the fourth quarter, according to CoreLogic. The average borrower now sits on about $270,000 in home equity.

Home equity is a popular way for people to build wealth. When tapped into, it provides borrowers with potential funds for paying off other debts, investments, renovations, or even as a financial buffer in case of emergencies.

How can you use home equity?

Since home equity is tied up in your property, it needs to be converted into liquid cash in order to be used. There are three main ways to do this: a home equity loan (HEL), a home equity line of credit (HELOC), or a cash-out refinance.

With a home equity loan, you keep your existing mortgage and take out a second loan against your property. These typically have lower closing costs but may come with slightly higher interest rates compared to cash-out refis. Here is a list of everything you need for taking out a home equity loan this year.

“Homeowners on average still have about $270,000 in equity, nearly $90,000 more than they had at the onset of the pandemic.”

–Selma Hepp, chief economist at CoreLogic

HELOCs work similarly to credit cards, with borrowing limits that can be repaid and reused. They usually come with variable rates and low or no closing costs, and you pay interest only on the outstanding loan balance. HELOCs also have set “draw periods” after which you have to repay the remaining balance in full. Here is a full list of HELOC requirements.

With a cash-out refi, you replace your existing home loan with a new primary mortgage. The new loan’s balance will be larger than what you owed, but that difference gets returned to you as cash. Refinance closing costs average around 2-5% of the loan amount and usually get taken out of your cash back total. See if you qualify for a cash-out refi.

Once you’ve cashed out your equity, it can be used for just about anything you want. Many homeowners tap equity to complete home improvements or repairs, consolidate high-interest debt into one cheaper loan payment, or make a down payment on a vacation home or rental property.

Borrowers’ latest home equity gains

Home equity grows or shrinks in conjunction with housing prices.

In 2022’s fourth quarter, borrowers gained an annual average of about $14,300 in equity. This equaled a 7.3% jump year-over-year and a combined $1 trillion in equity for mortgaged homeowners in the U.S.

“While equity gains contracted in late 2022 due to home price declines in some regions, U.S. homeowners on average still have about $270,000 in equity, nearly $90,000 more than they had at the onset of the pandemic,” said Selma Hepp, chief economist at CoreLogic.

Homeowners in certain states saw greater equity gains than others. In Florida, homeowners banked an average of $49,000 in the fourth quarter. In Hawaii they gained $37,100 and in New Jersey an average of $35,900. However, homeowners in Idaho saw annual equity losses.

How do I calculate my home equity?

Home equity is the amount of cash value built up in your property. As you pay down your mortgage and housing values increase, your equity grows.

To figure out your total equity, take your home’s current value and subtract your mortgage balance. If your house is worth $400,000 with a loan balance of $300,000, then you have $100,000 in equity.

Getting an estimated property value requires using an online evaluator, researching recent comparable home sales in your area, or paying for an appraisal. Your lender can assist you in this process and figure out the best way to take advantage of your equity.

How much equity can I take out of my house?

Typically, borrowers can’t cash out their entire equity amount. With exception, lenders normally prefer to keep 20% of your home’s value untouched as protection in the case of a default. The remaining amount is referred to as “tappable” equity.

Based on the example in the section above, your 20% buffer comes out to $80,000 ($400,000 x 0.2). After subtracting that from your total equity, you end up with $20,000 in tappable equity ($100,000 - $80,000).

Your next steps

If you’re ready to use the equity built up in your property, there’s no time like the present.

The best way to figure out how much you can borrow and which loan type to use is to talk with your lender. They can walk you through property valuations, what loan(s) you qualify for, and how to best tap your home’s cash value.

After all, taking advantage of your equity is one of the biggest benefits of owning a home and top ways of accumulating wealth.