Is Your Interest Rate Percentage Holding Your Equity Hostage?

By Bill Lyons | Updated on February 2, 2024

Investing in homeownership has many advantages. Over time, home values increase, allowing you to sell your home for more than you paid and passively earn money. However, that’s not the only way being a homeowner can help you earn. The longer you live in a home and pay your mortgage, the more equity you build up in a home.

You can use equity to make large purchases like paying for your child’s college tuition or buying a second home. Home equity loans are one way to take advantage of the equity you build over time by paying off your mortgage, and you shouldn’t be afraid to give up a low interest rate to live a better life by paying off debts and being able to afford the things you want.

Having a low interest rate can be difficult to give up, but it’s important to weigh that against the fact that credit cards and other types of debt often come with higher interest rates than mortgages. Is your interest rate holding your equity hostage and preventing you from using it to fund other large purchases or pay off debt? Don’t be house rich and cash poor simply because you feel tied to your current interest rate.

In this article, we’ll discuss interest rate and equity to help you determine whether you should leverage the equity in your home.

What Is Home Equity?

Equity is the amount of the home you own. It’s the difference between how much you owe the mortgage lender and how much your home is worth—or the share of your home that you own because you’ve paid your mortgage balance down and your home’s value has increased. The more you pay down your loan balance, the more equity you have in your home.

Home equity is a way to build wealth by reducing your mortgage debt and increasing the home’s value. Your property is your asset, and it’s often one of the most significant assets you own because it can appreciate in value faster than other types of assets. As a result, your equity can be a valuable resource when you need to fund major purchases or investments.

How Do You Build Equity In Your Home?

Building equity increases the amount of the home you own, ultimately increasing your investment in the property that can be used to fund purchases and pay for expenses later. Equity can be used to build long-term wealth, especially if you borrow equity as a loan and invest it or sell your home for more than you paid. There are several ways to build equity in a home, such as:

• Making a larger down payment: If you want to build equity in a home fast, the best way is to make a larger down payment because it means you own more of the home and can reduce your loan amount. The amount you put down becomes equity because it’s the amount you’re not borrowing, meaning a larger down payment can help you start building equity as soon as you become a homeowner.
• Paying your mortgage: When you pay your mortgage, you reduce the debt and effectively own more of your home, increasing your equity. But, of course, this only applies to paying the principal balance, not the interest. Therefore, if you have an interest-only home loan, you will have to wait to pay back the principal balance, ultimately delaying how quickly you can start building home equity.
• Improving the property: Home improvements are another way to increase your home equity because they increase your home’s market value. Even though your mortgage balance might remain the same, increasing the value of your home increases the amount of equity you build up.
• Increasing property values: Property values change over time and typically rise, although this isn’t always true. Your equity will rise as your home increases in value, depending on the economy, location, and other factors.
• Paying more toward principal balance: While this option isn’t always available depending on your lender and loan, you can pay more toward your principal balance to increase home equity faster. If you pay more towards your principal, you shorten the life of the loan while building equity, allowing you to take advantage of that equity faster or simply pay off your mortgage in less time.
• Getting a shorter loan term: Many people choose a 30-year mortgage loan, but the 15-year loan term allows you to build equity faster if you can afford it. However, the 15-year mortgage comes with higher monthly payments, so it’s not the right option for everyone.

The Relationship Between Interest Rate Percentage and Equity

Equity and interest rate percentage have a fairly simple relationship. When interest rates are low, equity is typically higher because you’ve paid off more of your home loan’s principal balance. However, having low interest rates can make you feel like you can’t tap into your home equity because you’re afraid of losing such a competitive rate.

Unfortunately, many homeowners let their interest rates hold their equity hostage, so they avoid leveraging their home equity, even when they really want or need it. Your home equity can be used for anything, from paying off large debts that impact your financial health to paying for your children to go to school or home improvements that can increase your home’s value and make it more comfortable for you. But if you have a low interest rate, tapping into your home’s equity may be less appealing because you don’t want to increase your interest rate.

However, homeowners looking to pay off debt or finance larger projects and expenses can leverage their home equity because home equity loans tend to have lower interest rates than credit cards and other types of loans. Equity isn’t liquid, so taking out a home equity loan or refinancing your home — even if it comes at a higher rate — may be in your best interest if you have large debts or costly expenses.

If you’re wondering if having equity vs. your interest rate is worth it for you, Griffin Funding can run an analysis to help you determine whether you should tap into your home’s equity.

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How Do Home Equity Loans Work?

If you want to take advantage of the equity in your home, you can take out a home equity loan to fund large projects and purchases or pay off debt. So how do home equity loans work? Home equity loans allow you to leverage your home equity, which can be used however you like. Additionally, home equity loan rates are typically higher than mortgage rates. However, even a loan with five, six, or seven percent interest still has lower interest rates than credit cards and various types of loans, making them ideal when you’re considering taking on debt.

Additionally, home equity loan rates are fixed, so you’ll have the same rate for the life of the loan, making it easy to understand how much you owe. With these types of loans, you’ll have another loan payment on top of your primary mortgage because you’ll receive your funds as a lump sum. Then, after you receive your loan amount, you’ll begin paying it back.

Besides home equity loans, you can leverage your home’s equity with a home equity line of credit (HELOC) or cash-out refinance. Comparing HELOC vs. home equity loans can help you determine the right option for you.

The main difference between home equity loans and HELOCs is that a HELOC is a revolving line of credit similar to a credit card. Instead of receiving the funds as a lump sum. HELOC loans have variable interest rates that fluctuate based on market conditions, so they can increase or decrease throughout the duration of the line of credit. HELOC loans give individuals flexibility and allow them to pull money from the line of credit during the draw period and pay down their principal. However, since interest rates fluctuate, homeowners may prefer a home equity loan with fixed rates instead.

The other option is to refinance your mortgage. A cash-out refinance replaces your original loan with a new one, including the balance you still owe and a portion of your equity. You can withdraw these funds as cash that can be used for anything while helping you get a lower interest rate on your primary mortgage.

Most people refinance their homes to reduce their mortgage rates. However, it may also make sense to refinance your home with a higher interest rate if it means being able to use some of the equity in your home for large expenses. There are several types of refinancing options, depending on your original mortgage loan. For instance, you could get a VA cash-out refinance if you have a VA loan.

Working directly with your lender can help you find the best option, whether it’s a mortgage refinance loan, HELOC, or home equity loan.

Benefits of Accessing Your Home Equity

As we’ve mentioned, there are instances where someone can and should take a higher interest rate to take advantage of their home equity. The benefits of accessing your home equity include the following:

• Accessing capital and improving cash flow: As we’ve mentioned, no one should be house rich and cash poor. If you need money to pay for large expenses, tapping into your home equity might be the best option, especially compared to other loan options.
• Competitive interest rates: Many people fear tapping into their home’s equity because it may come with higher interest rates. However, because home equity loan interest rates are much lower than other types of loans, it might be well worth it to help you pay off debts or make large purchases. Our home equity loans have competitive interest rates.
• Potential tax benefits: You may be able to take tax deductions on the interest paid on a home equity loan if the funds are used for home improvements or renovations.

Talk to Us About Competitive Home Equity Loan Rates

Borrowing against your home equity, even if it means having a higher interest rate, may be the best possible solution for your needs, whether you’re paying off debt or dealing with major expenses.

Are you ready to tap into your home equity to fund large purchases, projects, and major events? Griffin Funding is here to help. We can help you better understand the relationship between interest rate and equity to help you find the best types of home loans to start taking advantage of your current home equity.

Whether you’re wondering how to tap into your home’s equity or refinance your current mortgage, our mortgage specialists can help you make the right decision based on your needs. Contact us today to learn more.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.