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    For many, a home is the most significant investment they’ll make. But what’s the point of investing in a home if you don’t use that investment to better your life?

    According to Black Knight, total mortgage holder equity topped $16 trillion again in June of 2023, with tappable equity – the amount that can be accessed while retaining a 20% equity stake – climbing to $10.5 trillion. The average mortgage holder has some $199,000 in tappable equity available, meaning they were sitting on that much cash—or at least living in it.

    A property isn’t just a place to live; it’s a unique financial opportunity that can allow you to increase your cash flow and pay off significant debts. Tappable equity can be used to improve your quality of life, but only if you use it. Your home isn’t a liquid asset, but through various types of home loans and refinancing options, you can tap into your home’s equity.

    Keep reading to learn more about tappable equity and how you can tap into your home’s equity and improve cash flow.

    KEY TAKEAWAYS

    • Tappable equity is the amount of equity you can borrow against using a home equity loan, home equity line of credit, or cash-out refinance.
    • Unfortunately, not all of your home equity is tappable. Lenders usually only allow you to tap into 80% of your equity.
    • Home equity loans and lines of credit are second mortgages that require two monthly mortgage payments, while cash-out refinance loans allow you to replace your existing mortgage with a new one.
    • The right tappable equity loan option for you will depend on what you use the funds for and your unique financial situation.

    Tappable Equity Defined

    Tappable home equity is the portion of a homeowner’s equity that can be accessed or tapped into by taking out a loan against it. To fully understand this concept, you must understand the meaning of equity. Equity is the difference between the current market value of your property and its outstanding mortgage balance. For example, if your home is worth $400,000, and you owe $200,000 on your mortgage, your home equity is $200,000.

    Unfortunately, your house isn’t liquid, meaning you can’t just pull cash out of it like you could another investment like stocks. Instead, you’ll need to take out a home equity loan, home equity line of credit (HELOC), or cash-out refinance to access your home’s equity.

    Not all equity is tappable either. Lenders typically only allow you to tap into 80% of your equity.

    Other factors, such as your creditworthiness and income, may affect how much equity you can borrow against.

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    How Do You Calculate Tappable Equity?

    As we’ve mentioned, lenders typically only allow homeowners to borrow up to 80% of their home’s equity. The formula for calculating tappable equity is:

    Tappable Equity = Current Market Value of Property x 80% – Outstanding Mortgage Balance

    Using the example above, you could potentially borrow up to $320,000 (400,000 x 0.8). However, since you still owe $200,000 on your mortgage, your tappable equity is only $120,000 (320,000 – 200,000).

    In order to calculate your tappable equity, you need to know your property’s current market value. You can estimate it by looking at your area’s comps or using valuation tools. Your lender will order a third-party appraisal to determine your home’s current market value.

    What Can Tappable Equity Be Used For?

    Tappable home equity can be used for anything. While the loans you must use to borrow against your home’s tappable equity are mortgages, they don’t function like a primary mortgage. A primary mortgage can only be used for a house or property, while a home equity loan, home equity line of credit, or cash-out refinance can be used for anything, including the following:

    • Home improvements: Home improvements / renovations are investments that can increase the value of your home, giving you a higher return on investment (ROI) when you sell.
    • Debt consolidation: If you have high-interest debts, such as credit card debt, you can use a cash-out refinance, home equity loan or a home equity line of credit (HELOC) to consolidate those debts into a single, lower-interest loan. As of August 8th, 2023, Americans have $1 trillion of credit card debt with an average interest rate of 20.53%. Use our debt consolidation cashout refinance calculator to determine your overall savings.
    • Education expenses: Loans that allow you to access your home’s equity offer more affordable than student loans because they have lower interest rates.
    • Investments: Your home’s equity can be used to make other investments like purchasing more property or investing in other strategies. However, this is risky because it requires you to put your home up as collateral.
    • Emergency expenses: With tappable equity, you can pay for emergency expenses like medical bills or home repairs from events like fires, floods, and storms.
    • Retirement: Tappable equity can improve your cash flow in retirement with a reverse mortgage or allow you to pay off your existing mortgage and purchase a new, more affordable home.

    How to Access Your Tappable Equity

    We’ve briefly touched on the fact that there are several ways to access your tappable equity. Each loan option has its pros and cons, so you should consider your unique financial situation. Since your home isn’t liquid, you’ll need to borrow against the equity or convert it to cash to use it. Here are a few methods you can use to access your home’s tappable equity:

    Home Equity Loan

    A home equity loan is a second mortgage on your home. Unlike other options listed here, it’s a second mortgage, so you’ll be responsible for paying both the primary mortgage and secondary home equity loan.

    You receive a home equity loan as a lump sum with a fixed interest rate, and like your primary mortgage, it’s repaid in monthly installments over a fixed term. Unlike a conventional cash-out refinance, HELOANs go up to 90% of the value of the property.

    Home Equity Line of Credit

    The difference between a home equity line of credit vs. home equity loan is that a home equity line of credit works more like a credit card. However, like a home equity loan, it’s a second mortgage you’ll be required to repay in addition to your primary mortgage. With HELOC loans, you receive a revolving line of credit based on your loan amount. You can then borrow the money on an as-needed basis for a draw period that lasts anywhere from 5 to 10 years.

    The interest rate on home equity lines of credit are variable, but you only pay interest on the amount borrowed, offering more flexibility and the potential for affordability.

    Cash-Out Refinance

    A cash-out refinance replaces your existing mortgage with a new one of a higher amount. The difference between what you owe on your mortgage and the new mortgage is taken in cash that can be used for anything.

    Replacing your old mortgage with a new one eliminates the need to pay two mortgages at once. However, you can expect higher monthly payments because your new mortgage is a higher loan amount than your previous one. It is important to note that conventional and FHA loans are limited to 80% of the value of the property while eligible veterans can access 100% of the value of their property.

    Reverse Mortgage

    A reverse mortgage is an option for older homeowners over the age of 62. These loans allow borrowers to get a loan without a job by converting part of their home equity into cash to supplement their retirement income. Retirement mortgages like these allow borrowers to pay off their existing mortgage to downsize or take the cash out to pay debts or other large expenses.

    With a reverse mortgage, you can have access to a line of credit or receive your payments on a monthly basis. The largest benefit of this mortgage is that there are no payments on the amount borrowed until you sell the home or are no longer using it as your primary residence.

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    Benefits of Tappable Equity

    Model house sitting on top of $100 bills

    Tappable equity can help you improve your quality of life by allowing you to access cash from one of the largest investments most people make—their homes. There’s no reason to be house-rich and cash-poor, especially if you have other significant debts. The benefits of leveraging tappable equity include the following:

    Low Interest Rates

    Home equity loans, HELOC loans, cash-out refinances, and reverse mortgages have lower interest rates than other financing options like credit cards and personal loans. Lenders can offer these lower interest rates because the loan is secured against the property, reducing their risk.

    Read more about home equity and interest rates to help you understand why taking out a home equity loan is a better option than personal loans for consolidating debt.

    Large Loan Amounts

    Tappable home equity loans typically allow for larger loan amounts than other types of financing. Of course, the loan amount depends on how much equity you have and other factors like credit score and interest rate, but you may be able to borrow a substantial amount of money if you’ve owned your home for many years.

    Tax Deductions

    The interest paid on a home equity loan is typically tax-deductible if the funds are used to buy, build, or improve the home that secures the loan. Of course, this isn’t the most significant reason to get a tappable equity loan, but it may be a better option than another type of loan if you plan on improving your property.

    Flexibility

    Tappable equity gives you more flexibility in terms of the loan options available to you and what you can spend the funds on. For instance, you can choose either a home equity line of credit, HELOC loan, or cash-out refinance loan on your primary residence, second home, or investment property, and use the funds for everything from consolidating debt to investing.

    Financial Buffer

    Your house is a significant investment that can give you access to cash when needed. A tappable home equity loan can provide a safety net or financial buffer to pay for unexpected expenses like medical bills.

    Tap Into Your Home Equity with Griffin Funding

    Tapping into your home equity gives you access to cash at a better interest rate than other financing options. With so many options, finding the right home equity loan is crucial since it can affect how much you pay and when you have to repay it.

    Contact Griffin Funding today to learn more about your loan options. Our mortgage experts can help you find the perfect loan for your unique situation.

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    Frequently Asked Questions

    Are there any risks associated with tappable equity?

    There are risks to all investments and loans. Tappable equity loans require you to tap into your home's existing equity and take on a second or larger mortgage amount, increasing the odds of foreclosure if you're not careful. You should use your tappable equity wisely and never use it to buy things you otherwise couldn't afford.

    How do interest rates work for tappable equity?

    Interest rates for home equity loans and lines of credit vary based on factors like credit score, loan amount, and lending institution. Generally, interest rates for these types of loans are higher than those for primary mortgages but lower for other financing options like personal loans or credit cards.

    Are there any tax benefits to tappable equity?

    Interest paid on home equity loans or lines of credit may be tax-deductible but only when used to buy, build, or improve upon the home serving as collateral.
    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.