This tool estimates how much equity you have built up in your home. This number can be used to help determine if PMI should be removed from a current loan, or for loan qualification purposes on a mortgage refinance or a credit line against your home equity for up to four lender Loan-to-Value (LTV) ratios. Lenders typically loan up to 80% LTV, though lenders vary how much they are willing to loan based on broader market conditions, the credit score of the borrower, and their existing relationship with a customer.
For your convenience we publish current HELOC & home equity loan rates & mortgage refinance rates which you can use to estimate your payments and find a local lender.
The following table shows current 30-year mortgage rates. You can use the menus to select other loan durations, alter the loan amount, change your down payment, or change your location. More features are available in the advanced drop down.
Our rate table lists current home equity offers in your area, which you can use to find a local lender or compare against other loan options. From the [loan type] select box you can choose between HELOCs and home equity loans of a 5, 10, 15, 20 or 30 year duration.
Loan to value is the ratio of the amount of the mortgage lien divided by the appraisal value of a property.
If you put 20% down on a $200,000 home that $40,000 payment would mean the home still has $160,000 of debt against it, giving it a LTV of 80%.
LTV is the reciprocal
LTV is based on the total debt to equity ratio for a property, so if one borrows 80% of a home's value on one loan & 10% of a home's value on a second mortgage then the total LTV is 90%.
Lenders typically extend their best rates & terms to borrowers who put down a substantial down-payment. It shows that the home buyer has skin in the game and it gives the lender a margin of safety in case home prices fall & they need to sell the property after foreclosing on it due to the borrower missing payments.
The average down-payment on a home in the United States is about 10%.
Borrowers who obtain a conventional mortgage and put less than 20% down are often required to pay for property mortgage insurance (PMI). This is a monthly fee which is in addition to the typical loan payment. The insurance policy protects the lender's interests in the case of default.
The PMI charge is based upon the size of the loan & the size of the down-payment. The cost ranges anywhere from 0.3% to 1.2% of the amount borrowed.
This would mean that if you borrowed $200,000 to buy a home the annual PMI cost might range between $600 and $2,400. That would add $50 to $200 to monthly loan payments & the charge typically lasts until the loan's LTV falls to 78%.
Some borrowers who can't afford to put 20% down on a home might put 10% down and use a 10% piggyback second mortgage in order to avoid PMI charges.
Depending on the credit score of the borrower and the local real estate market lenders will typically allow borrowers to access anywhere from 80% to 90% of their home's equity. Borrowers with great credit scores might be able to borrow up to 95% in some cases.
Homeowners across the United States have much of their wealth tied up in home equity. The 2012-2016 American Community Survey 5-Year Estimate offers the following housing statistics.| Type of Dwelling / Financing Status | Unit Quantity | Marketshare |
|---|---|---|
total residential units |
134,054,899 |
100.00% |
occupied by renter or owner |
117,716,237 |
87.81% |
occupied by renter |
42,853,169 |
31.95% |
occupied by owner |
74,881,068 |
55.86% |
— no mortgage |
26,864,528 |
20.04% |
— mortgaged |
48,016,540 |
35.82% |
—— no second mortgage, no home equity loan |
40,296,854 |
30.06% |
—— second mortgage AND home equity loan |
281,865 |
0.21% |
—— second mortgage OR home equity loan |
7,437,821 |
5.55% |
——— only home equity loan |
5,715,049 |
4.26% |
——— only second mortgage |
1,722,772 |
1.29% |
In some cases the stability of homeownership is its own return, but sometimes needs arise which require homeowners to leverage their home equity to pay for major life expenses like home repairs, funding a growing business, investing in a child's education, or covering vital health expenses.
There are a number of different ways to leverage home equity, including:
Some of the main criteria in comparisons should be fees and interest rates, tax advantages, monthly payments, terms (years to pay) and intended use of the money.
We will look at four of the more common options for harvesting equity and refinancing – and when each option may make a smart move for you.
This table shows that most share the qualities of traditional financing, but a HELOC offers more flexibility:
| Feature | Cash out refinance | Home equity loan | HELOC | Personal loan |
|---|---|---|---|---|
| Adjustable interest rate | X | X (can be fixed rate) | ||
| Fixed interest rate | X | X | X (can be variable) | |
| Interest-only payment option | X | |||
| Pay on ONLY what you use | X | |||
| 15 or 30-year terms | X | X | X | |
| Good for smaller purchases | X | X | X |
Interest rates offered, best to worst, would likely be home equity loan, cash-out refinance, personal loan then the HELOC. Fees are likely to be highest with a cash-out refinance, as are your qualification hurdles.
Deciding between the different types of loans is usually going to be largely dependent on your intended use for the funds. How much you need, and for what purpose can direct you toward one loan over another.
The following table shows current 30-year mortgage rates. You can use the menus to select other loan durations, alter the loan amount, change your down payment, or change your location. More features are available in the advanced drop down.
Cash-out refinancing works like a normal mortgage refinance, except it also includes the homeowner withdrawing additional funds which are added to the loan balance.
When interest rates are low or falling many homeowners have incentive to refinance their home to save on their interest expenses. Refinancing a home can cost thousands of dollars in loan origination and processing fees, but those can easily be paid for by even small reductions in interest rates.
As the Federal Reserve lifted interest rates to cool the economy and offset the 2017 Tax Cuts and Jobs Act the structure of the mortgage market changed dramatically away from refinances to home purchases.
How COVID-19 Impacted the American Mortgage Market
Before the COVID-19 economic crisis nearly 70% of mortgages were for home purchases, whereas a few years earlier refinances dominated the market. After the COVID-19 crisis the Federal Reserve was forced to drop interest rates and engage in quantitative easing, buying a substantial share of Treasury issuance and mortgage backed securities. Both moves lowered interest rates to where mortgage rates in the United States fell to all time record lows. In response many homeowners refinanced their homes while cashing out equity at low rates.
Cash out refinances are typically slower to process and come with larger upfront fees than the other options, so they only make sense to use if you are obtaining a better interest rate or need a large sum of money for an extended period of time.
As interest rates rise homeowners save money by leaving their existing low-interest loans in place & tapping equity via other means. If interest rates fall homeowners can refinance at a lower rate, making fixed mortgages a one-way bet in the favor of the homeowner.
Loan-to-Value Limits
Lenders typically offer homeowners a maximum of an 80% to 85% LTV, though they may decide to offer people with good credit scores loans with an LTV as high as 100%. Typically banks compensate for a lower equity buffer by charging a higher rate of interest.
In August of 2019 government sponsored mortgages lowered limits to mitigate risk buildup in the residential housing market. HUD announced the limit on FHA & USDA loans would be dropped from an LTV of 85% to 80%. At the same time Ginnie Mae announced a new lower limit on VA cash out refinances, which limit LTV to 90% versus the previous 100% limit.
The HELOC acts more like a credit card, so it has a draw period (5-10 years where you can purchase things) and a repayment period (usually 10 to 20 years). The rate with a HELOC will most often be variable, making it a bit riskier than the other options in this regard. It is also common to overdraw a bit with a HELOC and incur harder-to-handle payments of interest-and-principal.
However, the HELOC can be a smart move when you have a series of smaller costs, perhaps spread out over a short time, and want to handle them fluidly. The ability to pay interest-only, and only on the amount you draw makes this option attractive for many borrowers.
HELOCs and home equity loans are typically approved in a 2 to 4 week period, with the approval process rarely taking more than 6 weeks.
HELOCs are popular with consumers, and lenders have created a variety of hybrid products that help expand the possibilities for affordable borrowing. Some offer fixed rates or a combination of variable and fixed. As this segment of the market grows you can expect more banks to offer additional lending products to cater to the consumer demand.
In 2017 TransUnion published a study on the return of HELOCs which stated they anticipate there will be approximately 10 million HELOCs originated between 2018 and 2022. The COVID-19 crisis threw these predictions out the window, but it shows how dramatically consumer preferences can change in changing interest rate environments.
| Year | HELOC Originations |
|---|---|
| 2012 | 700,000 |
| 2013 | 800,000 |
| 2014 | 1,000,000 |
| 2015 | 1,100,000 |
| 2016 | 1,200,000 |
| 2017 | 1,400,000 |
| 2018 | 1,600,000 |
| avg/yr 19-22 | 2,100,000 |
| 2019-2022 total | 8,400,000 |
Homeowners use HELOCs for many of the same reasons they refinance first mortgages.
| Category | Percent | Description |
|---|---|---|
| Debt Consolidation | 30% | Consolidate credit card debt & other higher interest forms of credit |
| Large Expense | 29% | Paying for a large home renovation or other similar credit need |
| Refinance | 25% | Replacing a prior HELOC with a better rate or other advantageous change of terms |
| Piggyback | 9% | Used as part of a down-payment on a mortgage origination |
| Undrawn | 7% | Line of credit on standby for a rainy day. |
Home equity loans, like a cash-out refinance, will use the home as collateral for the loan’s repayment. The main difference between them otherwise, is the addition of the existing mortgage, for a home equity loan does not include coverage of your mortgage refi, as with a cash-out refinance.
Instead, a home equity loan uses some of your earned equity to get you capital, now. It is often called a second mortgage and provides you a lump sum payout, to be used at your discretion. It will usually have an interest rate similar to a cash-out refi. While these loans are not as common or popular as HELOCs, many lenders offer them.
Personal loans are typically shorter-term loans, and larger amounts could require some form of securing collateral, though non-collateralized (unsecured) personal loans are common. The interest rate will be a few points higher than a mortgage to cover the lender’s risk, but your improving personal credit score and a lower DTI ratio will help you qualify for better offers.
Personal loans can be smart options when a smaller amount is needed, or the future is less certain than the present. You may pay slightly more in interest rates but will generally complete the loan in far less time, so will pay less overall for what is borrowed.
Note that personal loans may be offered from independent lenders, and not just banks. Be sure to compare rates and fees, as they will vary widely by provider. Numerous online platforms like LendingClub and Prosper also offer these types of loans.
Credit card debt which rolls over for an extended period of time can be exceptionally expensive. For that reason it is not advisable to carry a large credit card balance, but if you can find a card with a low introductory rate or a zero interest introductory period then it can make sense to leverage that so long as you can pay the card off before the higher rates of interest kick in. Some people are experts in stacking rewards programs which make the cards effectively less than free when the rewards programs are coupled with a low interest rate.
Some fintech startups offer equity sharing services which allow homeowners to sell a fractional stake in their homes, while other platforms will pay off the home and then lease it back to the homeowner. There are 3 big issues with these sorts off offerings.
1
The United States residential real estate market is heavily subsidized by the federal government through the use of tax breaks and through the use of government sponsored entities (GSEs) in Fannie Mae & Freddie Mac which provide liquidity in the secondary markets and hold down rates. During the Great Recession further subsidies were provided through bailouts and a quantitative easing program which saw the Federal Reserve purchase both treasuries and mortgage-backed securities.
2
After the subprime mortgage led great recession, the traditional home financing market has significant competition, transparency, & many consumer protections baked in via the Dodd-Frank law & the Consumer Protection Finance Bureau.
3
Many fast-growing startups have a risk of flaming out when market conditions turn. Fintech companies like Figure, Point, Unison or EasyKnock may have the best of intentions, but they can't control the economic cycle & are not as systematically important to the economic system as the GSEs or the big banks which were bailed out. Beepi was a fast-growing used car marketplace which raised over a hundred million of dollars, grew quickly, flamed out & was sold for parts.
It is probably advisable to see how the alternative finance companies perform throughout an economic cycle before considering them. Buying a home is something which should add stability to your family life & is not a great area to try something new on such a large purchase, particularly when the core market is so cost effective.
It is also worth noting that in some cases the math behind the deal simply does not work:
Is Selling Fractional Ownership a Good Idea? The Math Says No
The last time I ran numbers on one of these schemes, the parameters provided were to assume 4% appreciation, combined PMI/rate savings from having more down would be 0.5%, $1m home, 5 year ownership horizon, and the equity investor would reap 30% of appreciation.
Those were the assumptions the homebuyer gave me. It amounted to paying $65k to "save" $15k. Sounds like a great deal for the equity investor. Here it is. Saving $259/mo times 60 months was $15,540.
At 4% appreciation, the $1m home would be worth $1.216m after 5 years. 30% of $216k is $64,800. Turns out there is something worse than PMI. If you stretch it out more than 5 years, or assume more than 4% appreciation, the gap will simply get larger.
Seniors who want to use their home's equity to finance a retirement may want to consider a reverse mortgage, but it probably makes sense to see how the alternative equity providers do through a full economic cycle before considering them as a viable alternative to a vanilla mortgage.
With all forms of financing, it is incumbent on the borrower to understand the details, ramifications and requirements of their loan product. A cash-out refinance should inspire perhaps the most research and comparison, as these loans can be among the most complicated of mortgages.
However, as outlined above, in the right circumstances a cash-out refinancing can offer you the liquidity to accomplish many positive steps forward. You will want to carefully weigh each option against the others to determine which loan product truly makes your best fit – both now, and over time.
You generally want a specific purpose for the funds – or a HELOC might be more applicable, to have the credit line open as need be. Compare, at a minimum, the differences in:
By understanding clearly how your home equity options work, you can add it to your arsenal of potential solutions and take advantage of your earned equity & make the best selection for your situation, both now and in the future.
Explore conventional mortgages, FHA loans, USDA loans, and VA loans to find out which option is right for you.
Check your options with a trusted lender.
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