AS HOME VALUES HAVE CLIMBED, folks who own property find themselves in the position of seeing their equity increase, in some cases at a fairly rapid pace. For some, this means a home that was previously underwater has returned to positive equity.

Many homeowners who purchased at the bottom of the market have enjoyed a rapid rise in value simply through appreciation. This increase has many homeowners wondering what they can do to tap into this equity. As a result, the cash-out refinance mortgage has returned to popularity as a means to pay for needed home improvements, finance college educations or consolidate other debt.

Is this an option you may want to consider? How do you determine whether this is a good decision? What are your options?

There are two methods of accessing your home’s equity. A cash-out refinance pays off your existing mortgage and allows you to borrow a percentage of your home’s equity over and above your current mortgage amount. For example, if you bought your home in 2012 for $300,000 and financed 80 percent, your current loan would be about $235,000. If this same home is worth $400,000 today, you could refinance with a new loan of $320,000, resulting in about $85,000 cash out.

The downside to a cash-out refinance is that in many cases the interest rate on the new loan will be higher than the interest rate on your current loan, since rates are a bit higher today than two years ago. This increase in interest can sometimes be offset by the elimination of mortgage insurance, resulting in monthly payments near your current payment.

The second option for accessing your equity is the Home Equity Line of Credit (HELOC), a second mortgage that allows you to borrow against your home without affecting your current loan’s interest rate or balance. Most HELOCs are variable-rate loans, so they can be riskier than a fixed-rate refinance. Generally, the higher your HELOC loan balance, the greater the risk of your payment shooting up if rates suddenly increase. The nice thing about HELOCs is that they are credit lines, so if you pay down your balance your minimum payment decreases, and for a period of time you can turn around and re-borrow that money without any hassle.

The risks associated with any loan that pulls equity from your home is that if values fall, as they did in 2008, you may not be able to sell your home and have sufficient equity to pay off your loans.

If you are considering using some of your home’s built-up equity, weigh the costs, benefits and risks of each option. Determining what is the best for you depends on a number of factors.

Consider how long you plan to keep your property; the amount of money you need to borrow; the reason you want to access your equity; the type of loan you currently have; and your current interest rate. Since no two borrowers are the same, there are no cookie-cutter answers.

As always when it comes to real estate, this is likely your single biggest asset. Be cautious and enlist the assistance of a qualified professional who can help you weigh the benefits and risks of all your options.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or gbenjamin@rpm-mtg.com.

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