Debunking 5 Common Home Equity Myths

Estimated reading time: 3 minutes

Understanding home equity is an important aspect of homeownership. Whether tapping into your home equity is the right choice largely depends on your financial situation and whether you meet lender eligibility requirements. If you’re deciding between a refinance, cash-out refinance, or a home equity loan or line of credit (HELOC), browsing information online can be more confusing than helpful. To help you make informed decisions, let’s dispel 5 common myths about home equity.

What is Home Equity?

Home equity is the difference between what your home’s current market value and what is still owed to your lender. You can also think of equity as the part of your property that you outright own. More technically, your equity is measured as your property’s current market value minus any liens, such as a mortgage, second mortgages, or HELOCs.

What are Common Myths About Home Equity?

1. It Takes Homebuyers Years to Build Equity Before It is Usable

While it’s true that it takes some people a few years to build up enough equity to potentially qualify to borrow against it, it’s a myth that this is the case for every homeowner. There are various ways homeowners can build equity beyond making consistent monthly payments.

Some other common ways to build equity are:

• Putting down a larger down payment‍
• Paying more upfront costs at closing, rather than financing them into the loan
• Renovations or home improvements that may increase market value
• Making extra mortgage payments, if your loan allows

2. Taking Out Equity Always Makes Your Mortgage Payment Go Up

It’s also a myth that accessing home equity always increases your primary mortgage payment. The cost of your refinance will vary by product, loan term, and borrower qualifications.

Additionally, obtaining a home equity loan or line of credit (HELOC) is not the same as refinancing your mortgage. A home equity loan or line of credit are separate debt from your primary mortgage. Your original mortgage payment remains unchanged, but you may have a separate payment that increases total monthly obligations.

3. You Can Only Use Home Equity for Home Repairs

Just like purchase loans, there are numerous home equity loans and refinance products a borrower can utilize for their needs. While some programs have specific uses, such as renovation refinance loans, others offer more flexibility in how homeowners can use their equity.

It’s a myth that borrowers can only use their equity or refinance for home repairs. Other common uses are debt consolidation or cost management, such as healthcare or schooling costs. What the funds can be used for will depend on the loan program and lender guidelines.

4. There are No Refinance Benefits Besides Lowering Your Interest Rate

It’s a myth that the only benefit of refinancing is a lower interest rate. There are many reasons why a person may decide to refinance, such as shortening their loan term or consolidating debt.

For example, moving from a 30-year loan to a shorter term may help some borrowers pay off their loan faster and reduce the total interest paid over the life of the loan.

A cash-out refinance means you’re taking out a mortgage that is larger than your existing loan. After closing costs and the remaining loan balance are paid, the borrower receives the remaining difference. This type of refinance may also increase your loan balance, extend your repayment period, or result in higher total interest paid over time, depending on your loan’s structure.

5. Home Equity is the Same as Your Home’s Value

If your home’s value is $750,000, this doesn’t mean you have $750,000 in equity. This is a common myth because equity is influenced by both the amount you’ve paid toward your loan and changes in your home’s market value.

To get a grasp on how much equity you have, subtract your current mortgage balance from your home’s estimated market value or its appraised value. If we use the same $750,000 example and you still owe $500,000 on your mortgage, you would have approximately $250,000 in home equity.

Understanding this distinction is important, especially when it’s time to sell your home or borrow against your equity.

Your Home Financing Experts

We know that navigating the home financing process can be confusing. That’s one of the reasons why our Licensed Loan Originators treat every borrower with personalized guidance throughout the loan process. We’ll be with you from application all the way until closing, so you understand your loan and monthly payments. Whether you have questions about equity, your loan qualifications, or what programs are available to you, we’re here to help. Get connected to a Licensed Loan Originator and begin exploring your home equity options!