What Is Home Equity?

Home equity is the portion of your home’s value that you truly own. It's calculated by subtracting the amount you still owe on your mortgage from the current market value of your home. For example, if your home is worth $400,000 and you owe $250,000, you have $150,000 in home equity. This equity grows as you pay down your mortgage or as your property appreciates in value. It’s a valuable financial asset you can tap into, particularly when you’re ready to buy your next home.

Why Would You Tap into Home Equity for a Down Payment?

Using your home equity to fund a down payment on your next property allows you to make use of the real estate wealth you've already built. This strategy offers multiple advantages:

• Avoids Liquidating Investments: No need to touch retirement savings or sell stocks.
• Potentially Lower Interest Rates: Home equity products often carry lower rates than unsecured loans or credit cards.
• Competitive Offer Positioning: A larger down payment can help you secure better loan terms or outshine competing buyers.
• Stay Invested in Real Estate: You retain ownership of your current home (if keeping it) while investing in a second property.
  
  

It’s especially useful if you’re upsizing, relocating or purchasing a vacation or investment home and need quick, substantial funds for the new purchase.

Top Ways to Access Your Home Equity

There are three main ways to turn your home equity into buying power:

1. Home Equity Loan: A lump-sum loan with fixed payments over a set term, ideal for large one-time costs like down payments.
2. Home Equity Line of Credit (HELOC): A revolving credit line you draw from as needed, often used for flexible or phased expenses.
3. Cash-Out Refinance: Replaces your existing mortgage with a larger one, giving you the difference in cash to use however you choose.
   
   

Each method has different repayment terms, interest rate structures and approval requirements. Choosing the right one depends on your cash flow, risk tolerance and timeline.

Home Equity Loan: Lump-Sum Leverage

A Home Equity Loan is ideal when you need a one-time infusion of funds at a predictable time, such as a down payment. Here's how it works:

• Structure: You borrow a set amount, secured by your home and repay it over 10-30 years with a fixed interest rate.
• Benefits:
  • Stable monthly payments for easier budgeting
  • Fixed rate protects against market volatility
  • Access to substantial capital without selling your home
• Drawbacks:
  • Adds a second monthly payment if you still have a mortgage
  • Your home is collateral for the loan, which means that missed payments can lead to foreclosure

This is a powerful tool for borrowers who want certainty and plan to use the funds immediately, such as closing on a new house.

HELOC: Flexible Financing Option

A Home Equity Line of Credit (HELOC) offers revolving access to your home’s equity. It’s similar to how a credit card works, but backed by real estate. It’s ideal for buyers who want flexibility, especially if their new home purchase timeline or costs are unpredictable.

• Structure: Draw funds as needed during an initial draw period (typically 10 years), which starts when you draw out funds, followed by a repayment period (usually 20 years).
• Interest Rates: Usually variable, though there are exceptions.
• Advantages:
  • Access money only when you need it
  • Only pay interest on the amount drawn
  • Reuse funds as you repay
• Ideal for:
  • Buyers needing partial down payments or bridge funds
  • Those planning staggered improvements on a new property

A HELOC can offer flexibility for less clearly defined spending and timelines, but you should budget carefully for potential rate hikes.

Cash-Out Refinance: Combining Equity Usage with a New Mortgage

A Cash-Out Refinance replaces your current mortgage with a larger one, giving you the difference in cash. You get a new loan with fresh terms, typically at a new interest rate.

• Example: Let’s say your home is worth $500,000 and you owe $300,000. A lender might approve a new loan of $400,000, giving you $100,000 in cash at closing.
• Benefits:
  • Combines equity access with the simplicity of a single monthly payment
  • May offer lower rates than a second loan
  • Useful if you already plan to refinance
• Cautions:
  • Higher loan balance means higher monthly payments
  • Closing costs apply, often 2–5% of the loan
  • Not suitable if you plan to sell soon
    
    

This is a strong strategy if your existing mortgage terms aren’t ideal and you want to unlock equity while retooling your financing.

Risks to Consider Before Borrowing Against Equity

Tapping your home’s equity can unlock powerful financial advantages—but it isn’t risk-free. Here’s what to weigh before committing:

• Foreclosure Risk
  Your home is collateral. If you miss payments on a HELOC or home equity loan, your lender can initiate foreclosure.
• Additional Mortgage Burden
  If you're keeping your original property while buying a new one and you haven’t yet paid off your first property, you will juggle two mortgage payments, plus the equity loan or line.
• Variable Interest Exposure (HELOCs)
  If interest rates rise, your monthly payments could rise accordingly, straining your budget if you did not plan for rates to increase or if your financial health suffered in unexpected ways.

Use equity strategically, with a long-term plan in place. This financing approach works best for those with stable income, solid credit and enough cash reserves to weather market fluctuations.

Smart Strategies to Use Equity Wisely

Tapping into your home’s equity offers a path to major financial moves—but it demands discipline and foresight. Use these strategies to ensure your equity works in your favor:

• Match the Loan to the Goal: Use lump-sum home equity loans for single-purpose needs like a down payment or full home purchase. Opt for a HELOC if your costs will be spread out, such as renovations or staggered expenses.
• Make Sure It’s Worth The Risks: Equity should fund high-value opportunities—a new home, strategic investments or property upgrades—not depreciating items and certainly not discretionary spending that will endanger your overall financial health.
• Plan for a Safety Buffer: Maintain a cash reserve alongside your equity-funded investment. Unexpected costs (maintenance, tax changes and so on) can arise quickly.
• Use Windfalls to Pay Down: Consider applying bonuses, tax refunds or sale profits to reduce your equity loan balance. This lowers long-term interest and frees up borrowing power later, should you need it.
• Work With a Lender You Trust: Ideal Credit Union can help you evaluate loan structure, timeline and market conditions to avoid overextending your finances.

These options offer different benefits as well as their own terms, risks and timing challenges. 

Turning Built-Up Equity into Buying Power

Your home can do more than give you a place to lay your head at night. It can help you build wealth. Now, that equity can be the key to your next home, a vacation property or other long-term investments.

Ideal Credit Union is here to help you unlock that potential with smart, secure lending options:

• Home Equity Loans for predictable, one-time funding
• HELOCs for flexible, draw-as-needed access
• Cash-Out Refinancing for combining equity release with new mortgage terms
• Transparent terms, no hidden fees and member-first lending practices
  
  

Our experts will help you compare options, run the numbers and determine the best solution for your goals. Whether you’re ready to borrow or just exploring possibilities, we’ll help you move forward with clarity and confidence.

See our Home Equity Loans and Lines of Credit to get started.