How To Get Equity Out of Your Home Without Refinancing
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Summary:
If you want to access your home’s equity without resorting to a cash-out refinance — which can be harder to qualify for and may raise your interest rate — you have several options available. A home equity loan, a home equity line of credit (HELOC), or a shared equity agreement are only a few alternatives to cash-out refinancing. Each option has its benefits and drawbacks, and not every choice is right for all individuals, so it’s worth looking into each option before deciding which is best for you.
If you have equity in your home and you need money as soon as possible, you have a variety of options to turn that equity into cash. This is true whether you’re still paying off a mortgage or you’re living in a completely paid-off home. One option to pull equity out of your home is a cash-out refinance; however, this isn’t the right choice for everyone.
If you’d rather not resort to a cash-out refinance, keep reading to learn more about traditional home equity loans, HELOCs, and other alternatives for accessing home equity without refinancing. First, let’s look into the reasons why cash-out refinancing isn’t always the best choice.
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What is a cash-out refinance?
A cash-out refinance is when you take out a new, larger loan to replace your existing mortgage and receive your home’s equity in a lump sum payment. Historically, taking out cash-out refinance loans has been a great way for homeowners with good credit scores and substantial equity in their homes to access a large amount of money for home improvement projects, investments, and other financial goals.
However, homeowners who bought or refinanced their home in 2020 or 2021 likely received an interest rate too good to part with. This makes refinancing a much less attractive option to tap home equity because higher interest rates will make your new loan a lot more expensive.
You’ll also be stuck with a larger mortgage loan balance than you had previously, which, combined with the higher interest rate, will leave you with a bigger monthly mortgage payment. In addition, when you refinance, you’ll need to pay closing costs, which will add to the overall cost of the loan.
If all of this sounds unappealing, the good news is that there are other options to tap into your home’s available equity that don’t require refinancing.
How to get equity out of your home without refinancing
The following are some of the ways you can access the equity in your home without refinancing:
- Home equity loans
- Home equity lines of credit (HELOCs)
- Shared equity agreements (also known as home equity investments)
- Sale-leaseback agreements
- Reverse mortgages
Pro Tip
You can use the money from your home equity for anything you want, but some common uses for a home’s equity funds include debt consolidation, making home improvements, or starting a business.
Home equity loans and home equity lines of credit (HELOCs)
Home equity loans and HELOCs are two of the most common options to borrow equity from a home without changing the terms of the current mortgage. However, although they have a similar purpose, they involve different methods of accessing that cash.
Home equity loan
When you take out a home equity loan, you’re given a lump sum of money, which you’ll start to pay back immediately with interest (note that home equity loans typically come with fixed interest rates). The loan must be repaid over a set period of time — the repayment period is usually anywhere from five to 30 years — in fixed monthly payments.
A home equity loan is also known as a second mortgage because you’re paying it alongside your original primary mortgage. It’s important to remember that your house is used as collateral for a home equity loan, so if you can’t make every monthly payment, you put your house at risk of foreclosure.
Home equity line of credit
A home equity line of credit, or HELOC, works more like a credit card than a loan. You withdraw money for as much or as little as you need (up to a specified credit limit) within the draw period of your contract. During the draw period, you’re usually only required to make interest-only payments.
HELOCs typically come with variable interest rates, which can make the monthly payments more difficult to budget for. However, you’ll save money in the long run if you avoid making interest-only payments. Instead, you’re better off chipping away at the loan balance as much as you can. The lower your credit balance, the less interest you’ll pay overall.
What else to know about home equity loans and HELOCs
In addition to interest, you’ll typically need to pay closing costs on HELOCs and home equity loans, which can add around 2% to 5% to the total cost of the loan — although Vik Gupta, head of home equity at PNC Bank, says these lending options are typically less expensive than refinancing.
“Home equity loans and lines of credit (HELOCs) often have lower closing costs than cash-out refinances. They allow homeowners to borrow against their equity as a second mortgage without altering the terms of their original mortgage, which is especially favorable if the homeowner has a competitive interest rate and would like to maintain it. This flexibility makes them great options for short-term financial needs.”
You’ll also need to have a good credit history, sufficient equity in your home (at least 20%), and a loan-to-value (LTV) ratio of 80% or less in order to qualify for these types of loans, which can place these options out of reach for some borrowers.
Pro Tip
“Home equity loans and lines of credit (HELOCs) are great options for homeowners with substantial equity already built up in their homes [who are] seeking funds for large expenses, like home improvement. While these are strong options for gaining access to funds, borrowers need to be mindful of associated risks and be comfortable repaying the loans, as their house will serve as collateral.” — Vik Gupta, head of home equity at PNC Bank
Shared equity agreements
A shared equity agreement, also known as a home equity investment, is another way to access your equity without refinancing — with the added benefit that it won’t add existing debt to your primary mortgage.
In a shared equity agreement, you sell off a portion of the future equity of your home for one lump sum payment. Essentially, you’re selling an ownership stake of the home to a home equity investor, but you retain the house, you don’t take on any new debt, and you don’t need to pay interest.
“The main benefit of home equity investment is that it offers homeowners a way to tap into their home’s value without taking on additional debt, and they get cash out of it. They also often don’t require monthly payments,” says Adie Kriegstein, licensed real estate salesperson at Compass Real Estate.
However, at the end of the contract (usually 10 to 20 years), or when the home is sold, you will have to give the investor their share of the equity, which can vary based on the property value at the time of the sale or the end date of the agreement.
“One potential downside is that home equity investments can be expensive, as investors typically charge fees and take a percentage of the home’s value, which can add up over time,” adds Kriegstein.
Shared equity agreements may be a smart move for you if you want to pull equity from your home without incurring more debt. It can also be a good option if you don’t meet the credit score and income levels that lenders typically require for more traditional types of home equity lending.
Sale-leaseback agreements
Another option to access equity in your home is with a sale-leaseback agreement. In a sale-leaseback agreement, you sell your home entirely and keep the equity you’ve built up in the home, then lease back the right to continue to live there.
With a sale-leaseback agreement, you no longer have to worry about mortgage payments or property taxes, as these become the responsibility of the new owner. You will, however, need to start paying rent to the investor who bought your house, but you’ll have successfully secured the equity you’ve built up in the house without taking out a new loan.
One drawback of a sale-leaseback agreement is that your monthly payments for rent could end up being more than your old mortgage payments. This is because the homeowner or investment company who purchased the house likely paid more for it than you did, so they’ll want to cover the new mortgage payments with your rent. Another drawback is that being a tenant and no longer an owner means you’ll have to abide by the rules of your lease agreement, essentially losing the freedom that comes with homeownership.
Pro Tip
“A leaseback agreement can be a win-win for buyers and sellers. Buyers gain the advantage of instant rental income and potential tax benefits, while sellers benefit from a seamless transition.” — Gagan Saini, director of acquisitions at JiT Home Buyers
Reverse mortgages
If you’re over the age of 62, you may want to consider a reverse mortgage, also known as a home equity conversion mortgage (HECM). Similar to a home equity loan, a reverse mortgage allows you to borrow money against your house. However, you won’t have a second mortgage and you won’t make monthly mortgage payments. Instead, the loan is repaid when you no longer live in the home, usually due to you or your heirs selling the house.
With a reverse mortgage loan, you are still required to pay property taxes and homeowners insurance, and you must use the property as your primary residence. In addition, you are responsible for maintaining the house in good condition, and the fees can be steep, says Kriegstein.
“[Reverse mortgages] allow homeowners to access the equity in their homes without having to sell or move, but one of the drawbacks is that they often have high fees and interest rates.”
It’s worth noting that while an HECM loan isn’t the only type of reverse mortgage, it is the only one insured by the federal government, specifically through the Federal Housing Authority (FHA). Other reverse mortgages may only be used for specific purposes, and they may only be available to people with low-to-moderate incomes, according to the Consumer Financial Protection Bureau (CFPB).
How to get equity out of the house you’ve paid off
If you’ve already paid off your home, you’re in an even better position to access your home equity: since you no longer have your original mortgage, the value of your house is entirely equity. Of course, the most obvious way to access your home equity is by selling your home, but that’s not always a desirable option.
For one thing, you’re already living in a paid-off home, so choosing to sell and downsize could subject you to capital gains tax. On top of that, you may be happy living where you are, but you need the money for other purposes, such as debt consolidation or an investment.
As a result of living in a paid-off house, your odds of qualifying for home equity lending are often greatly increased, particularly for options such as home equity loans and HELOCs, says Gupta.
“It typically makes qualifying for a home equity loan or line of credit easier if you’ve paid off your home. A fully paid-off home indicates substantial equity. However, other factors like credit score, income, and a history of on-time payments play a role in the approval process as well.”
Is it a good idea to take equity out of your house?
The decision to access the equity in your home greatly depends on your financial situation, your credit history, and how much equity you have, among other factors. In essence, it’s not a decision to be taken lightly or free money to be used frivolously; you need to have a solid goal in mind before tapping into your home’s equity.
Unlike with other types of loans, such as auto loans and certain personal loans, the loan proceeds from a home equity loan or a home equity line of credit can be used however you choose. Having said that, it’s best to think of that money as an investment to improve your personal finance situation rather than as a windfall to be used as discretionary income.
Consider using the funds from your home’s equity to make valuable home improvements that will increase the value of your house, to pay off high-interest credit card debt, to make a down payment on an investment property, or to start your own business.
Key Takeaways
- While a cash-out refinance allows you to access home equity, it may not be the best option, as it comes with a higher interest rate and a larger mortgage loan balance.
- Alternatives for getting equity from your home without refinancing include home equity loans, HELOCs, home equity investments, sale-leaseback agreements, and reverse mortgages.
- A home equity loan or HELOC will have a better interest rate than other lending options, such as a personal loan, but they can be harder to qualify for due to their stricter requirements.
- The requirements for shared equity agreements and sale-leasebacks are generally less stringent, but they may cost you some of the value of your home in the long run.
- Not all homeowners are eligible for a reverse mortgage due to age, equity, and income requirements.
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