How soon can you pull equity out of your home?

Buying a new home is an exciting time. In between unpacking, decorating, and making plans for the future, you might find yourself a little short on cash. Now that you’re a homeowner, you can also access the equity in your home to borrow money — but how soon is too soon to pull equity out of your home?

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Many homeowners are surprised to learn that there aren’t any limits on when you can borrow against your home equity after buying a new home. If you meet a lender’s requirements, you can get approved for home equity financing as soon as the paperwork clears from your home purchase. In practice, however, it takes most people several years before they’re eligible to apply for home equity financing. 

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We’ll help you explore when you’re ready and able to pull equity out of your home in this article. 

Understanding home equity

Home equity is the lien-free value of your home. In other words, it’s how much of your home that you “own” outside of any contracts with a lender. Here is how to calculate it:

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Home equity (in dollars) = (Estimated home value) - (outstanding home debts)

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You can also calculate it as a percentage like this:

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Home equity (as a percent) = ([Estimated home value] - [outstanding home debts]) / Estimated home value

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For example, let’s say you own a home in Brevard, North Carolina, worth $500,000 and you have $300,000 remaining on your mortgage balance. In that case, you’d have:

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$500,000 - $300,000 = $200,000 in home equity

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If you calculate that as a percentage, you have:

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($500,000 - $300,000) / $500,000 = 0.40, or 40% home equity

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The amount of equity you have in your home depends on two factors: your home’s value, and how much you owe on any debts that use your home as collateral. In general, your home equity increases over time as your home rises in value and you pay down any debts attached to your home, like your mortgage. Once all of your home debts are paid off, you’ll have 100% equity in your home. 

How soon can you pull equity out of your home?

Most lenders require you to have at least 20% equity in your home before you can pull equity out, although some may have lower limits or even none at all. According to the National Association of Realtors, first-time homebuyers put an average of 8% down on their home in 2023, as opposed to 19% for seasoned homeowners — not quite enough to reach the 20% mark needed to tap into your home equity. 

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If you didn’t put down at least 20% on your home when you purchased it, you’ll need to wait for your home to rise in value and/or pay down your mortgage before you build enough equity in your home to use. That may take several years for some homeowners, especially if they made a very small down payment or if their home doesn’t appreciate in value very quickly. 

How to calculate your tappable home equity

Once you’ve built sufficient equity in your home, you can calculate how much you may be able to borrow by calculating your loan-to-value (LTV) ratio. It looks like this:

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Loan-to-value ratio = (Outstanding home loan balance) / (Current home value)

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Continuing our above example, the current LTV ratio on your Brevard home with a mortgage on it would be:

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$300,000 / $500,000 = 0.60, or 60% 

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You can use this number to calculate how much you can potentially borrow:

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Potential loan amount = ([Lender’s maximum LTV ratio] - [Your current LTV ratio]) x Your home’s value 

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Let’s say you need to borrow money to renovate the basement in your Brevard home to rent out as an Airbnb. Using this formula, you have the potential to access this amount of money:

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(0.80 - 0.60) x $500,000 = $100,000 of equity available to borrow

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Lenders may also set minimum dollar amounts in addition to LTV ratio limits. If you’ve just barely crossed over the magical 20% home equity line, you may still not yet have enough equity to qualify for a loan. If your lender only offers home equity loans from $35,000 on up but you only have $10,000 in equity available, for example, you’ll still need to wait a bit before you can pull equity out of your home.

The pros and cons of using home equity

Pros

• Few restrictions on uses of funds
• Helps build credit with on-time payments
• Short and long-term funding options available
• Lower interest rate than unsecured funding options
• Good tax benefits if you use funds for certain purposes
• Many ways to borrow: loans, lines of credit, and equity investments

Cons

• Likely to pay closing costs
• Risk of foreclosure if you default on repayment
• Higher total interest cost for longer-term borrowing options
• Lengthens time period before you own your home debt-free

How to draw on your home’s equity when you’re ready

Once you know how soon you can pull equity out of your home, the next step is to figure out which vehicle to use. Homeowners today have more choices available than ever:

Home equity loan

A home equity loan — also known as a second mortgage — is a separate loan from your mortgage. Home equity loans are dispersed in one lump sum and repaid with steady monthly payments at a fixed interest rate. Typically, you’ll need at least 20% equity in your home to be eligible. Generally, you’ll need a good credit score and an income sufficient to make your mortgage payments plus your home equity loan payments. 

Home equity line of credit

Home equity lines of credit also typically require at least 20% equity. Rather than receiving a single burst of funds, a HELOC allows you to borrow money at your leisure during the “draw period,” lasting five to 10 years, to be repaid over 10 to 20 years during the “repayment phase.” A HELOC offers more flexibility to borrow when you need, but is typically more expensive and has a more erratic repayment schedule. 

Home equity investment

Home equity investments, or HEIs, are a non-debt way to borrow money against your home’s future equity in 10 or 30 years. An HEI does not require monthly payments and is repaid in a single balloon payment at the end of the agreement period as a share of the home’s value. Point requires at least 20% equity to get approved for an HEI.

Reverse mortgage

Reverse mortgages are available to people aged 62 or over. They’re designed to offer funds to homeowners with significant equity in their home, typically 50% or more. These loans reduce the equity in your home over time, and while special provisions do exist, it may be harder for family members to keep your home after you’re gone 

Cash-out refinance

A cash-out refinance allows you to replace your existing mortgage with a new one, taking out additional funds in the process. You’ll also generally need at least 20% equity in your home, although your outstanding loan balance will be greater when the dust settles. 

Should you use home equity to borrow money?

Many people opt to tap into their home equity because of its lower cost and easier qualifications. It’s simply cheaper for most people to use a home equity line of credit to pay for remodeling, for example, than a personal loan. Funding options such as home equity investments can also be more affordable for homeowners on a limited income since payments aren’t required until the end of the term. Qualifying may also be easier, in some cases, especially if you don’t have the greatest credit. 

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Consider your reasons for borrowing funds as well. Home equity financing is versatile and can be used for a lot of things, but in some cases, other financial products are more appropriate. If you have unpaid medical bills, for example, working with your healthcare provider on a payment plan offers certain benefits for your credit score as opposed to using other methods to pay it off.  

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Finally, consider your ability to repay the loan and your long-term plans. One of the risks of tapping into your home equity is the potential to lose your home if you run into financial problems in the future. Although this is rare, no one has a crystal ball. If you sell your home while you still have outstanding debt against your home, you may also receive less money from the home sale. Borrowing against your equity now also limits your ability to do so in the future.

Final thoughts

Pulling equity out of your home can be an attractive way to borrow money, especially during the honeymoon phase as you settle into your home and make it truly yours. Home equity financing can be especially useful for upgrading your home – but is also worth considering if you need to consolidate higher-interest debt, pay for higher education, start a business, etc.

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However, unless you put a significant amount of money down, chances are you won’t be able to tap into your home equity for several years. Even then, it’s worth considering your full suite of options — including ones that don’t use home equity, such as credit cards and personal loans — to ensure you’re making the best decision for your family.

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