Published: Jan 6, 2020
Illustrations by Julian Burford
For many Americans, their house is their most valuable asset. Regular mortgage payments can build equity, which can help homeowners in various ways, including refinancing for home improvements or borrowing against the home to help pay for college or consolidate debt.
At the end of 2018, U.S. homeowners had $5.9 trillion in tappable equity, just below the all-time high of $6 trillion, according to Black Knight.
Here are answers to five commonly asked questions about how to responsibly leverage home equity to get both your house and your finances to a better place.
It comes down to the numbers. For the vast majority of consumers, you’ll need to meet these criteria:
- Equity in your home of at least 15% to 20% of its fair market value, as determined by an appraiser. This calculation may also be described as a loan-to-value ratio, which is the amount compared to the value of your property.
- A credit score of 620 or higher, a track record of paying off debt and a documented ability to repay the loan.
- A debt-to-income ratio—your monthly debt payments divided by your pretax income—typically below 50% for a fixed-rate loan and below 43% for a home equity line of credit.
Every situation is different, and the choice you make depends on factors like your credit history, income and the value of your home. Perhaps most important, the purpose of the loan—home improvement, lower rates, debt consolidation or some combination—will determine the best route. A Chase Home Lending Advisor can help navigate the choices.
Whatever your goals may be, there are two main options:
A home is valuable collateral, so home loans typically have much lower rates than other types of debts, such as credit cards, auto and student loans. A cash-out refi is a great way to consolidate various debts into one loan.
“Many clients will do a refinancing, take a look at revolving debts like credit cards and wrap it into their mortgage,” says Fady Semaan, executive director and senior lending manager at JPMorgan Chase & Co.
By spreading payments over the term of a mortgage (typically 15 to 30 years), clients are able to both lower their monthly payments and make progress paying down the debt, Semaan says. “It does stretch the payments over a longer period, but when people are making minimum payments [on a credit card], they’re making little to no traction in paying off the balance.”
Lenders will generally allow you to borrow 75% to 90% of the value of your home. Assuming there are no other liens on the home, here’s an example of what that would look like:
In any scenario, the biggest factor to consider is whether you really need the loan and can manage it responsibly. If you’re wondering how much you may be able to borrow, Chase has a calculator that can help.
Taking on any debt has risks. Applying for a home loan requires a “hard inquiry” on your credit report, which could cause a temporary dip in your credit score.
Refinancing involves upfront costs like paying for an appraisal, title fees and a quarter of property taxes. These expenses can be rolled into the loan and you’ll get a refund on the unused portion of your existing insurance and escrow account, but there will be a lag.
“We don’t want people to be extended outside their means,” Semaan says. “If they are rolling revolving debt into a 30-year fixed, yes the monthly payment goes down, but you are stretching it out over time.”
Finally, if something sounds too good to be true, it probably is. Always read the loan agreement to make sure you understand the terms and can be confident you’re taking on debt you can manage responsibly and for the right reasons.
