If you need additional funds, tapping into your home equity is one of many options you have. This can be useful if you don’t otherwise have enough cash in a checking or savings account and do not want to liquidate funds from investment or retirement accounts. In this piece, we will discuss the many alternative ways to get equity out of your home.
Accessing your home equity for cash is a process that typically takes several weeks, so if you anticipate a need for funding, it’s best that you plan ahead. Funds obtained from your home equity can typically be used for anything, such as home improvements, repairs, debt consolidation, and more.
Here are several ways you can access your home equity for cash, each with its own set of pros and cons.
Summary of Alternative Ways to Get Equity Out of Your Home
The best method of pulling equity out of your home will depend on your unique circumstances and goals. Each also carries its own set of pros and cons. Here is a quick summary of the different ways you can pull equity out of your home:
- Home equity loan: You’ll receive a lump sum of cash and will have monthly payment requirements. A home equity loan is an additional mortgage payment you must make each month. You’ll typically need at least 20% equity in your home to qualify.
- Home equity line of credit (HELOC): A flexible line of credit that allows you to draw funds on an as-needed basis for up to 15 years in most cases. Just like a home equity loan, a home equity line of credit is an additional mortgage payment that must be made each month, and payments are based on how much you draw. To qualify, you’ll typically need at least 20% equity in your home.
- Cash-out refinancing: Replaces your current mortgage and gives you additional funds to be used for things like debt consolidation, home improvements, and more.
- Reverse mortgage: Allows you to receive recurring monthly payments in exchange for your home equity. Typically requires you to be at least age 62 and have a home that is owned free and clear.
- Home equity investment: Gives you a lump sum of cash in exchange for a percentage of your home’s future increase in value.
- Sale-leaseback: Allows you to sell your home but remain in the property as a tenant. Easiest to get as there are no age, credit, or income requirements.
Home equity loan
With a home equity loan, you’ll receive a lump sum of funds. A mortgage lender will usually give you a fixed interest rate with repayment terms of up to 15 years.
This type of loan is best if you know how much funding you need and are unlikely to have recurring needs for more funds. If you end up needing additional funding, you would need to apply for another loan. Since this is a second mortgage, it can also be a good option if you want to keep the terms of your current mortgage, which can be the case if it has a low interest rate or other favorable terms.
With a home equity loan, your home is used as collateral for the loan. This means that if you default, your lender can foreclose on the property. In order to qualify, you’ll need to have a sufficient amount of equity in the home. This will vary from lender to lender, but it’s recommended that you have at least 20% equity. Lenders will also need to verify your credit and income to ensure you have the ability to repay the loan.
Home Equity Line of Credit
A HELOC, or a home equity line of credit, is a revolving credit line that allows you to draw funds on an as-needed basis. You can draw funds up to the credit limit set by your lender and is commonly used as a home equity loan alternative because it has more flexibility.
Just like a home equity loan, a HELOC is a second mortgage. However, you’ll typically get a variable interest rate, although some lenders will allow you to get a fixed interest rate on a small portion of your balance.
The draw period for most HELOCs is between 10 and 15 years. Since you can decide when to draw funds, it’s a good option if you are not sure how much funding you need, if you foresee a recurring need for additional funds, or want to have access to funding in the event of an emergency.
Getting a home equity line of credit involves many of the same processes and requirements as a home equity loan. One thing to be aware of, however, is whether the HELOC you get comes with any fees. Common fees can include the following:
- Annual fee: Some lenders may charge an annual fee to cover the administrative costs of maintaining your HELOC. This can be between $0 and $200 per year, although some lenders waive this fee based on your annual usage of the HELOC.
- Inactivity fee: If your HELOC has no activity for a certain time frame, you could be charged an additional fee. This can range from $0 to $20 per month and typically is not assessed until your HELOC is dormant for at least 6 to 12 months.
- Draw fees: Depending on your lender, you may incur a fee for each individual draw made from your HELOC.
- Prepayment penalty or early closure fee: Some lenders discourage early payment of your HELOC by assessing a prepayment penalty.
- Minimum draw fees: The terms and conditions for some HELOCs require each draw to be of a minimum dollar amount. Fees may be charged if this is not met.
Cash-out refinance
A cash-out refinance replaces your existing mortgage and gives you additional funds. These funds can be used for debt consolidation or deposited into your bank account. By replacing your existing mortgage, you’ll be able to get a loan with new terms, including a new interest rate and length of repayment.
As an example, if you had a mortgage loan of $200,000, you could do a cash-out refinance for $250,000. The proceeds from the new loan would be used to pay off the current mortgage, and the remaining $50,000 could then use for other things such as home improvements or debt consolidation.
To get a cash-out refinance, you’ll need to submit a loan application with a lender. It commonly takes several weeks to finalize the process as they must verify things like your credit, income, assets, and your property condition and value.
Reverse mortgage
With a reverse mortgage, you can receive payments from a lender in exchange for your home equity. You’ll be able to continue living in the home, and payments can be structured as a single lump-sum payment, in monthly installments, or a line of credit. As part of the terms and conditions of getting a reverse mortgage, you agree to maintain the property and remain current on property taxes, homeowner’s association dues, and property insurance.
Reverse mortgages do not have to be repaid until the property owner decides to sell the home, moves out, or becomes deceased. Since your equity in the property will be reduced, it’s important to consider how it could impact potential heirs. Properties with less equity as a result of a reverse mortgage could result in heirs needing to come out of pocket with funds in the event they wish to retain the home.
As with the other options we’ve mentioned, there are some pros and cons to consider. To get a reverse mortgage, you’ll typically need to be at least age 62 or older. You must also own your home free and clear or have a significant amount of equity. Check out this guide to see if you might qualify for a reverse mortgage.
Home equity investment
A home equity investment, also referred to as an equity sharing agreement, gives you funding in exchange for a percentage of your home’s future increase in value. Funds you receive do not require any monthly payments. Rather, repayment is done at the end of the specified time frame (typically five to 10 years).
As an example, let’s say you currently own a home worth $1 million and need funds for home improvements. In exchange for the funds you need, you agree to give the home equity investment company 25% of your home’s increase in value over the next five years. During that time frame, if your home goes up in value by $500,000, you would then owe $125,000, plus any fees and closing costs.
As you can see, as your home’s value increases, the more you’ll owe. Fees and closing costs can also be expensive. However, qualifying for this type of financing can be easier than a traditional loan, so it can be a good option if you have been unable to get financing elsewhere due to credit or income-related issues.
Sale-leaseback
A sale-leaseback occurs when you sell your home but remain in the property as a tenant. This is a fairly simple transaction as you will not take on any debt, and you’ll have no restrictions on how you can use the proceeds from the sale. Another added benefit of a sale leaseback is the fact that you probably won’t have to perform extensive repairs or tidy up the home to show to potential buyers.
Since you’re selling your home, many of the requirements for a traditional loan do not apply. There are no requirements for age, credit, or income. There’s also no minimum amount of equity you must have in your home to sell it, although it will impact the amount of funding you’ll receive.
Choosing How to Get Equity Out of Your Home
To choose the best option for getting equity out of your home, you can narrow your choices by determining which ones you are eligible for. You can also consider other factors, such as whether there are any required monthly payments, interest rates, and more. Here are some additional factors you can use in picking the best option for you:
- Qualification requirements (age, credit, income, amount of home equity)
- Fees, interest rates, and interest payments
- Monthly payment
- Repayment period
- Type of loan (closed-end loan such as a cash-out refinance or home equity loan, or revolving line of credit)
