Property values have skyrocketed over the past 12 months, meaning homeowners have more home equity now than ever before. If you’re trying to figure out how to take equity out of your home and turn it into cash, there are several ways this can be done. You can look into cash-out refinances, home equity loans, home equity lines of credit (HELOCs), or reverse mortgages.
By tapping into your home’s equity, you can get cash to do things like pay off high-interest rate credit cards, fund college expenses, or finance a home improvement project. And with data from the NAR showing home values increasing over 13% over the past 12 months, it means now is a great time to be taking advantage of your increased home equity.
But the right loan to accomplish these goals will be based on your own unique circumstances. Different types of loans have their own eligibility criteria and characteristics. If you’re interested in seeing which option might be best for you, continue reading as we’ll dive into the details of each.
With a cash-out refinance, your existing mortgage will be replaced with a new loan at a higher balance. For example, if your existing mortgage has a balance of $200,000, you could do a cash-out refinance with a new loan amount of $250,000. That new loan amount would be used to pay off the old loan, and the remaining $50,000 would be deposited into one of your bank accounts.
With that said, you’ll have several options to choose from when it comes to what type of cash-out refinance loan to go with, such as conventional loans, jumbo loans, FHA loans, and VA loans.
Conventional loans can offer highly competitive interest rates and fees, and the amount of home equity you can take out will depend on the characteristics of your loan, such as occupancy and property type. Generally speaking, you can do a cash-out refinance up to 80% of your home’s value. For a conventional loan, you’ll usually need to have a solid credit score and a stable employment history. If you qualify, you’ll usually be rewarded with interest rates that are more competitive than many other types of loans.
If your loan amount exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA), you will need to find a lender that offers jumbo loans. Because of the higher loan amount and higher risk to lenders, jumbo loans typically have higher interest rates compared to conventional mortgages. They will also usually have stricter guidelines and require more paperwork when it comes to documenting your credit, income, assets, and may also have higher equity requirements.
FHA Cash-out loan
If you’re not able to qualify for a conventional cash-out refinance, you can consider an FHA cash-out loan instead. While similar to a conventional cash-out refinance, the big difference here is that the new loan will be insured by the FHA, and therefore, will need to meet their requirements.
FHA cash-out loans allow you to have a lower credit score, although you will have to pay monthly FHA mortgage insurance premiums (MIPs) on the new loan. You may also have to prove you’ve been using the home as your primary residence for the past 12 months, along with other requirements such as documenting your income and whether you have a sufficient amount of home equity.
VA cash-out loan
Unlike many other cash-out loans, a VA cash-out refinance allows you to get a loan up to the full value of the home. VA loans are restricted to those with qualifying military service, and you must have a VA home loan Certificate of Eligibility. Lenders may also have additional requirements for things like credit and income, and you must plan on living in the home as your primary residence.
Can I access my home equity without refinancing?
If you’re not keen on mortgage refinancing because you want to keep the terms on your existing mortgage loan, there are still ways you can tap into your home’s equity. These options include home equity loans, home equity lines of credit (HELOCs), and reverse mortgages.
Use a second mortgage (home equity loan) to access your home equity
A home equity loan, sometimes also referred to as a HEL or HEL, is a second mortgage that uses your home as collateral. Most lenders offer this loan at fixed interest rates, and you can choose what loan amount you want. The loan proceeds are disbursed at a single time in a lump sum, so you’ll want to think carefully about how much cash you need. If you apply for less than what you need, you’ll need to apply again for a larger home equity loan, assuming the lender allows it.
Secure a home equity line of credit (HELOC) to access your home equity
A home equity line of credit, also commonly referred to as a HELOC, has a draw period that gives you the flexibility of accessing funds as you need over a certain period of time. If you’re uncertain how much cash you’ll need, or foresee needing more cash over the years, then a HELOC can give you that flexibility of having access to cash without having to apply for another loan.
The tradeoff for that flexibility is that most HELOCs have variable interest rates. The structure and terms of HELOCs can also vary significantly between lenders, so you’ll want to think about how you plan on using the HELOC before committing to any one lender’s terms. This can include things like annual fees, prepayment penalties, whether monthly payments are interest-only, and how long you can draw funds from the HELOC.
Consider whether a reverse mortgage is an option
If a home equity loan or equity line of credit is not an option, you can also consider a reverse mortgage. Reverse mortgages allow you to receive monthly payments from a lender in exchange for the equity in your home. Depending on your age, this could be an option if you’re looking to get cash out of your home.
To be eligible for a reverse mortgage, you’ll typically need to be age 62 or over with a sufficient amount of home equity; however, there are certain instances where a reverse mortgage is an option once you reach age 55.
What states allow reverse mortgage at age 55?
If you live in one of the following 19 states, there’s a good chance you can qualify for a reverse mortgage at age 55:
- New Mexico
- Rhode Island
- South Carolina
Consider a reverse mortgage loan (home equity conversion mortgage) if you’re older than 55
If you might qualify for a reverse mortgage, there are a few different types of loans you can consider: home equity conversion mortgages, single-purpose reverse mortgages, and proprietary reverse mortgages.
- Home equity conversion mortgage (HECM): An HECM is the most common type of reverse mortgage. This type of loan is insured by HUD and tends to be more expensive than a conventional mortgage, although it has no requirements for income or medical conditions.
- Single-purpose reverse mortgage: Often a less expensive option, a single-purpose reverse mortgage is typically offered by a local city or state organization. However, this may not be an option depending on where you live, and just as the name implies, the proceeds may only be used for purposes that the lender approves.
- Proprietary reverse mortgage: Unlike HECMs, proprietary reverse mortgages are offered by private lenders. These are not backed by HUD and may offer you more flexibility in getting approved if you’re otherwise not eligible for a HECM.
Am I eligible to pull equity out of my home?
To qualify for a home equity loan, lenders typically need to verify you meet certain requirements. Often, this can be as simple as documenting you have a sufficient amount of equity in the home, acceptable credit, and enough income to repay the loan. However, other circumstances, such as the condition of your property and state regulations, can also impact your ability to qualify for a home equity loan.
Is the property eligible?
Before issuing any type of home equity loan, many lenders will want to ensure that the home is in good condition. Properties in pending litigation or have liens against the home may not be eligible. The lender may also require an appraisal inspection to ensure no repairs are needed, and that there are no health or safety hazards or items that could otherwise impact the property value.
There may also be state-specific restrictions and guidelines. The state of Texas, for instance, is known for having strict laws regarding home equity cash-out refinances, one of which does not allow for a home equity line of credit to be issued on a home that already has an existing cash-out refinance loan.
Are you eligible as a borrower?
If you’re taking out a home equity loan, you’ll need to show you have the ability to pay it back, and your credit and income are two areas a lender will focus on.
The interest rate you qualify for will be dependent on your credit score. But beyond that, lenders will review your credit report to see how much debt you currently carry, and will use this to determine whether you can afford the monthly payments on the loan amount you are requesting.
Similarly, a lender will review your income to ensure you have a stable employment history that is likely to continue. If you’re self-employed, be prepared to provide tax returns and other financial statements like balance sheets and profit and loss statements. If you’ve changed jobs frequently, you can still qualify, although if you earn anything other than a base salary (such as bonus, tip, or overtime income), the lender may require additional documentation to see whether you’ve had a history of the same type of earnings.
How soon can you tap into your home equity?
In most cases, there is no waiting period, and you can access your home equity as soon as the value is sufficient to meet a lender’s guidelines. Many lenders will only lend up to 80% of your home’s value, however, this can vary depending on the type of loan requested, occupancy, and property type. If you’ve just purchased a home with little to nothing as a down payment, chances are you’ll have to wait several years to build up a sufficient amount of equity in your home.
How much of your home equity can you use?
The amount of home equity you can use will vary depending on the property type, loan program, and the lender’s requirements. VA loans, for instance, can allow you to access up to 100% of the value of your home.
As a general rule of thumb though, most traditional mortgages and home equity loans will lend up to 80% of the home’s value, assuming you can also afford the monthly payments.
Is it a good idea to take out home equity?
As long as getting cash from your home equity benefits you financially, whether it is for the short-term or long-term, it can absolutely be a good idea. Below are some examples that meet these criteria by allowing you to pay fewer interest fees, increase the value of your home, get additional investment returns, or by increasing your own future employment prospects with additional education.
- Paying off higher interest rate debt
- Using the equity to pay for home improvements, renovations, or upgrades
- Pay for emergency expenses
- Paying for college expenses
How do I increase my home equity?
The more your property is worth, the more home equity you can build. And the market value of your property comes down to what potential buyers would be willing to pay. Making any necessary repairs, upgrades, or renovations could make it more appealing to buyers and accomplish the goal of increasing its value.
Home renovations, repairs, and upgrades
Certain repairs and home upgrades tend to raise a property’s value more than others. To get the most value, here is a list of home improvements that you can consider:
- Bathroom remodel
- Adding more bedrooms
- Updating light fixtures
If you do decide to conduct home improvements, look at homes in your neighborhood that have similar characteristics to get ideas on how you can make yours stand out. You’ll also want to be careful not to over-improve your property to the point where it is too significantly different from what homes in your area typically look like. For example, expanding your home to 8,000 square feet when most homes are only 2,000 square feet will most likely not yield any noticeable increase in value, as most buyers looking for homes in your area probably would not need, use, or be able to afford such a large home.
How do I calculate my home equity?
To calculate how much home equity you have, you’ll need to know 2 things: what your property is worth, and the amount of mortgage loans you have on the property. So a property worth $400,000 with a $300,000 mortgage would have $100,000 worth of equity.
When talking about equity, you may also hear the term loan to value ratio or LTV. This is calculated as the dollar amount of mortgage loans, divided by the property’s value. Using the same example as above, the home would have a loan-to-value ratio of 75%. This LTV ratio is one item that many lenders use to determine how much they are willing to lend.
How can I figure out my property value
To figure out your property value, you’ll need to know what a buyer is willing to pay for your home. And one of the best ways to do that is to see what similar homes have recently sold for. To do this, you can do your own research, hire a certified appraiser, or list your property for sale.
Listing your property for sale
This is perhaps the most accurate way to get an idea of what your property is worth. However, unless you are seriously considering selling your home, it’s also the least practical. You’ll need to enlist the help of a licensed real estate agent to not only market your home, but also clean and stage your house to make it more appealing to prospective buyers. Some real estate agents also offer a service to list your home off-market where you can try a certain pricing strategy to see how buyers might react.
Hiring a certified appraiser
If you’re not seriously thinking of selling your home, the next option is to have a certified appraiser provide you with an opinion of value. When you hire an appraiser, they will research homes similar to yours that have sold recently. If there are any differences in the homes, such as size or room count, they will use their expertise in the market and make the appropriate upward or downward adjustments in arriving at an opinion of value for your home.
Conducting your own research
If you’re not keen on spending any money to hire a certified appraiser, you can conduct your own research. Third-party websites like Zillow, Trulia, and Redfin can provide you with a lot of good information about homes that have recently sold, and how similar they are to your property. They do not, however, take into consideration nuances of the property that an appraiser may have. This can include things like what view the property has, the condition of the property when it was sold, or whether any seller credits may have influenced the final sales price.