How to Safely Cash In on Your Home Equity Windfall

What You Need to Know

Is it safe to use your home as an ATM, especially as fears of a recession loom? And, if so, what steps should you take?

You may not feel it yet, but if you’re an American homeowner you’re probably a good bit richer after the dizzying run-up in housing prices last year. But how do you tap into your newfound wealth? And should you?

U.S. homeowners gained an average $55,300 in their home’s value (minus their mortgage) in 2021. In some especially hot cities, such as Denver and Miami, the increase was close to $80,000, while in high-price Los Angeles and San Francisco, it was more than $110,000.

That’s a remarkable jump considering it’s taken three to four years to see gains of $50,000 in prior rising markets, said Frank Nothaft, chief economist at real estate analytics firm CoreLogic.

For anyone wanting to sell, it’s a windfall — just find a buyer and turn that appreciation into cold hard cash. But what if you’re happy staying put?

With all the current market volatility, inflation and other economic uncertainty, it’s only natural to want to tap those gains now, perhaps by borrowing against your newly increased equity (the difference between your home’s current value and what you owe on your mortgage.)

Is it safe, though, to use your home as an ATM, especially as fears of a recession loom? It actually can be a smart play, if you use the money wisely and pick the right loan product.

The two main options for tapping equity are to refinance a mortgage, or acquire a home equity line of credit. For the first, you use your home’s higher value to secure a bigger mortgage at a set interest rate, pay off the original smaller loan with the proceeds and pocket the difference.

But most people who could benefit from such “cash-out refis” did so before interest rates started to head higher.

So let’s look more closely at the home equity line of credit. If you’re looking to do home renovations, tapping home equity can be a prudent way to do it. A line of credit usually makes the most sense because you don’t have to know exactly how much you’ll be spending.

You’re approved to borrow a certain amount at an interest rate that typically floats with the market, and then you can draw money as you need it. (With a cash-out refi, you receive a lump of cash all at once, whether you plan on using all of it or not.)

If you’re in good financial shape — meaning, you’re doing all the things advisers say you should, such as putting money away for retirement — and you plan to use the money to, say, upgrade your home office situation or improve your backyard, go for it. You’ll create more value in your home and make your life more enjoyable, too.

If it still feels scary to borrow against equity that magically appeared in the past year (might it disappear just as quickly?), take solace in the fact that — thanks to the housing bust 15 years ago — we have many more guardrails these days when it comes to borrowing against home equity. Banks limit how much you can take out, and they require more documentation to qualify than they used to.