Home equity refers to the value that you build in your property. It includes appreciation, which is subtracted from your owed mortgage balance. You can cash out this value while preserving 20% of the equity, which is a requirement set by the lender to protect their investment.  

Tappable equity allows homeowners to pay for certain expenses, such as remodeling their house, paying their children’s tuition fees, etc. In recent years, tappable equity has hit an all-time high due to low mortgage rates and high home prices.

Other ways to build home equity are making a bigger down payment and paying the principal first. Since mortgage rates are at record-low, most homeowners hold 73% home equity. 

Here’s an example to help you understand how home equity works: 

You bought a home for $400,000 in 2020 with a 20% down payment. You built $80,000 worth of equity and have a mortgage of $320,000 (60% LTV). Over time, the house appreciated in value and now costs $600,000. You are left with $260,000 in the mortgage, leaving you with $340,000 in home equity ($600,000 – $260,000) and $220,000 in tappable equity. The tappable equity comes from subtracting 20% of $600,000 ($140,000) from $340,000 (home equity). 

These are some applicable examples of areas comparing home equity by metro area between 2019 and 2021:

• Sarasota, FL – Q4 2019 = $93k; Q4 2021 = $201k; Change = +108k
• Boise City, ID – Q4 2019 = $11k; Q4 2021 = $233k; Change = +114k
• Austin, TX – Q4 2019 = $116k; Q4 2021 = $245k; Change = +129k
• Oxnard-Ventura, CA – Q4 2019 = $229k; Q4 2021 = $359k; Change = +130k
• Urban Honolulu, HI – Q4 2019 = $245k; Q4 2021 = $390k; Change = +145k
• Seattle, OR – Q4 2019 = $215k; Q4 2021 = $373k; Change = +158k
• San Francisco, CA – Q4 2019 = $442k; Q4 2021 = $622k; Change = +180k
• San Diego, CA – Q4 2019 = $250k; Q4 2021 = $432k; Change = +182k
• Los Angeles, CA – Q4 2019 = $326k; Q4 2021 = $514k; Change = +188k
• San Jose, CA – Q4 2019 = $545k; Q4 2021 = $775k; Change = +230k

Although tappable equity increased in the second quarter of 2022, 11 of the top 50 equity-rick markets in the Western part of the US saw a decrease. 

Accessing Tappable Home Equity 

Once you have built sufficient equity, you can borrow the funds in the following ways: 

• Cash-Out Refinance 
• Home Equity Line of Credit (HELOC) 

The first option is similar to getting a second mortgage. Your previous mortgage is simply replaced with a larger loan. Remember: You might not get the same interest rates as your last loan, which means the monthly payments on the new loan might be higher.

Cash-out refinance is a less beneficial option. The second option is HELOC, which has a variable or adjustable rate.

It allows you to browse lenders and go with the one that offers the lowest interest rate. Tapping into your home equity only makes sense if you use it wisely.

Most people buy things they don’t need, frivolously spending most of the cash. It’s important to have a goal in mind.  

For example, investing in a business or renovating your property to increase its value. The cost of borrowing has increased significantly, which is why tapping into your home equity makes sense.  

If you are in debt or have a huge medical bill, consider falling back on your home equity. Don’t get into the habit of withdrawing funds in this manner. Otherwise, you might start spending the money to pay for everyday expenses.