Equity, we know it’s a good thing to have, but oftentimes people don’t know what they can do with it or how to access it. I’ll give an example…recent clients, highly educated with a doctorate, were sitting on a lot of high interest consumer debt, roughly $125,000, accumulated while in school. they were also sitting on about $250,000 worth of equity they could access in their current home. They just didn’t realize they could tap into that equity, pay out the debt, eliminate about $2,000 in minimum payments they were making each month AND their mortgage payment only went up about $150.00 because when we refinanced their home, we put them in a lower interest rate.

That’s the power of equity.

To know what you can do with your equity, you really need to understand how much equity you can access, it’s really simple, you can access up to 80% of your homes appraised value. So let’s say your home is appraised at $800,000, you can access 80% of that or $640,000. In this example, let’s say you owe $300,000 on your current mortgage, you can put $340,000 into your bank account. Now should you? It depends on if you’re doing it for a specific reason. To just refinance for the sake of refinancing, doesn’t make any sense.

So what reason’s could you refinance for? In my view, you should refinance if it’s going to provide you value in return. If you’re going to take the money, complete renovations to increase your property value, use the money as a down payment on a rental unit, consolidate high interest debt, take advantage of lower interest rates, those are value adding reasons. Refinancing to afford a dream vacation, I wouldn’t recommend it, but if that’s where you get value from, then so be it. The reasons you may want to refinance are essentially endless, provided they make good financial sense.

Now you know the what and why, let’s talk about the how. Pulling out that equity isn’t a terribly complicated process, you’ll have to complete a mortgage application, an appraisal will be ordered to determine your property value, and from there, you can borrow up to 80% of that value. Whatever you still owe on your current mortgage will be paid out, and the remainder of the money will be deposited into your account, and you’ll start with a new mortgage. Pretty simple. Now if instead of a refinance to pull out equity, you want to use a home equity line of credit (HELOC), the same steps apply, only instead of receiving a lump sum payment, you’ll have the funds available to you in the form of a secured credit line. Like a regular credit line, as you borrow money from and then pay back funds to the line, the money will become available to you again. You won’t have a regular payment for the HELOC portion, you’ll have a minimum payment you’ll need to make.

So what’s the difference between doing a refinance and doing a HELOC? Think of a refinance as a one time payment of the money whereas a HELOC, you can spend the money and as long as you pay it back, it becomes available to you again, so it’s continually available. The only drawback is that with a HELOC, it can only make up 65% of your total borrowed amount. So in our example above, home is valued at $800,000, you can access $640,000 (80%) the maximum HELOC you can add is $416,000, the rest of the $640,000 has to go into a fixed term mortgage which is just like a regular mortgage. Depending on the lender, as you pay down the fixed portion, the new equity you build will be automatically added to the HELOC until you reach that maximum 65%.

Equity is such an important item in your financial toolbox because it allows you opportunities to build your financial future. Whether you take the funds and invest them into your retirement savings, or you purchase a rental property, you are taking steps to secure your future. As a big believer in using equity to build your financial empire through real estate, to me that is the single biggest reason to assess your equity and take steps to access it.