How To Get Equity Out Of Your Home

Article Summary:

You can get equity out of your home through a home equity loan, HELOC, or cash-out refinance. These funds can be used for everything from renovating your home to consolidating other loan expenses, and investing in property or a business. Before committing to one loan, compare alternative options and fees to ensure you’re finding the best rate.

You know that the mortgage payments you make each month help to build your home equity (in other words, your ownership). What you may not know is how easily you can tap into the equity you’ve built. You can use that equity for all kinds of projects, such as home improvements, debt consolidation, a new business, or investing in another property.

Here is a quick guide on how to get equity out of your home.

Sell your home

I hate to be Captain Obvious here, but selling your home is probably the most straightforward way to unlock the equity in your home. It has the advantage of maximizing the amount of equity you can withdraw from your home at once and there are no strings attached.

However, it means you will have to move out of your home. You also miss out on the opportunity of leveraging the value of your home while living in it and (hopefully) also benefit from the increase in value of your property.

How to get equity out of your home without selling

You have several options when it comes to taking equity out of your home without selling. Below we’ll look into the four most common ways to get equity out of your home. We will also explain the differences between a home equity line of credit, home equity loan, a cash-out refinance, and shared equity agreements, as well as the key features of each one.

Home equity lines of credit

A home equity line of credit (HELOC) is a revolving debt that allows you to pull equity from your home. Similar to a credit card, a HELOC has a certain credit limit that you can spend. Once you’ve reached your credit limit, you must pay off some of your balance before you can draw additional funds. However, you can use the line of credit over and over again until the draw period is over.

HELOCs are broken up into two parts: a draw period and a repayment period. During the draw period, you can use the line of credit and make interest-only payments. During the repayment period, you’ll make payments on the interest and principal of the debt and can no longer use the line of credit to spend.

Home equity loans

A home equity loan is similar to a HELOC in that you can pull equity from your home by taking on a second loan in addition to your mortgage (which is why these loans are often referred to as second mortgages).

The key difference between these products is that, unlike a HELOC, a home equity loan is a lump sum term loan with a fixed interest rate. This means you borrow the money once and pay it back based on a predetermined repayment period. Once you’ve paid off part of your loan, you can’t borrow against it again. You’ll make a monthly payment on the principal and interest until the loan is fully repaid.

Cash-out refinancing

A cash-out refinance is a type of home loan you use to refinance your current mortgage. Instead of replacing your mortgage with another one of the same size, you borrow more than you actually owe on the home and receive the difference in cash, which you can then use for any purpose.

In the case of a cash-out refinance, the equity you pulled from the home is simply a part of your new mortgage. As a result, you’ll make one payment each month instead of making two separate payments. Keep in mind that because you’re taking out an entirely new mortgage loan, the process of qualifying for a cash-out refinance is the same as qualifying for any other new home loan.

Shared equity agreements

Shared equity agreements, sometimes known as home equity investments, enable a home buyer or homeowner to sell a slice of your home equity in exchange for a one-time cash payment from an investor. Such agreements allow you to liquidate part of your home equity for cash or sometimes are used in the home purchasing process to help prospective homeowners with a down payment.

Why take equity out of your home

There are many reasons someone might take equity from their home in the form of cash. One of the most popular reasons to borrow against your home equity is for renovations. Not only will you get access to the funds you need, but these expenses can increase the value of your home, which then increases your home equity more.

Another reason someone might get equity out of their home is to consolidate other debt. Credit cards, personal loans, and other types of loans often have higher interest rates than mortgages, and having many multiple payments can be overwhelming. Consolidating all of that debt with a HELOC, home equity loan, or cash-out refinance gives you a lower interest rate and fewer monthly payments.

Finally, you can use the funds from your home equity to pay for any other large expenses such as your child’s college education, the down payment on a second home, or to start a business. While it’s true that you could finance these expenses with a personal loan or another type of loan, debt that has your home as collateral often comes at a lower interest rate, making it more affordable.

How to calculate your home equity

If you’re considering taking equity out of your home, it’s important to know just how much equity you have built up. Your home equity is essentially the amount of your home that you own (versus the portion the bank owns).

You can calculate your home equity by subtracting the amount you owe on your mortgage from your home’s appraised value. For example, if your home is worth $250,000 and you owe $100,000, then you have $150,000 of home equity. And, as the housing market changes, so does your equity. You can get more equity in your home simply when its market value increases.

Pro Tip

Mortgage lenders generally won’t let you borrow against the full value of your home. Most require that you maintain 15 to 20% equity in the home if you use a HELOC, home equity loan, or cash-out refinance.

Pros and cons of taking equity out of your home

There are some key advantages to borrowing against your home’s equity, but there are also some downsides that you should know about.

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and drawbacks to consider.

Pros
  • Lower interest rates. Interest rates on home equity loans, HELOCs, and cash-out refinance loans are considerably lower than the rates on credit cards or personal loans.
  • Multiple options. Because there are several ways to get equity out of your home, each homeowner can decide the best tool for their situation.
  • No restrictions on using funds. There are few restrictions on what you can use the money from your home’s equity for, meaning you can use the funds however you want to.
  • Potential tax deductions. If you use the funds from your home equity to pay for capital improvements to your home, the interest payments on the debt may be tax-deductible.
Cons
  • Your home is collateral. Your home serves as the collateral on a HELOC, home equity loan, and cash-out refinance, meaning that if you can’t make the payments, you could lose your home.
  • Potential additional payment. Taking out a home equity loan or HELOC will add an additional monthly payment you’ll have to make, in addition to your mortgage payment.
  • Higher mortgage. Using a cash-out refinance will increase your mortgage amount and likely stretch out the number of years until you’ve fully paid off your mortgage loan.
  • Underwater mortgage. If the market value of your home decreases after you’ve borrowed against your home equity, you could end up underwater on your loans.

4 tips for taking equity out of your home without selling

Taking equity from your home to pay for home improvements, debt consolidation, or anything else can be a good solution if you’ve really thought it through. Here are a few tips to help you along the way.

1) Shop around for the best rates

As with any other type of debt, the interest rates on HELOCs, home equity loans, and cash-out refinance loans can vary from one mortgage lender to the next. As a result, it’s important to shop around for the best rate. You can apply for pre-approval with several lenders to see which can give you the best deal.

Pro Tip

Many borrowers assume they have to refinance their mortgage with their current lender, but that isn’t the case. Just as you may have shopped around for your original mortgage loan, you can also shop around for a different lender for your cash-out refinance.

2) Understand the tax benefits

Depending on what you use the funds from your home equity for, you may be eligible for a tax deduction on your interest payments. In general, you can deduct your interest if you use the funds for capital improvements, meaning those that increase the value of your home.

Capital improvements could include finishing your basement, adding an extension to the home, or adding a pool to the yard. However, basic repairs such as a new roof or replacing a broken window wouldn’t be considered capital improvements.

If you don’t use the funds for capital improvements, you can’t deduct your interest payments. In the case of a cash-out refinance where you don’t use the cashed-out portion for capital improvements, you would be able to deduct the portion of interest on your original mortgage balance, but not the new balance.

3) Consider closing costs and fees

You may be subject to closing costs and fees for your HELOC, home equity loan, or cash-out refinance, just as you would on a regular mortgage. In general, the closing costs on a home equity loan or HELOC will be lower simply because your loan balance is lower. But for a cash-out refinance, you will end up paying the full closing costs on the new mortgage.

A cash-out refinance lender may allow you to wrap your closing costs up into the loan. However, keep in mind that this will further increase your loan balance and, therefore, your monthly payments.

4) Check your credit score before applying

Whether you’re eligible for a HELOC, home equity loan, or cash-out refinance—and the interest rate you may be eligible for—is heavily dependent on your creditworthiness. Most lenders require a certain credit score to borrow against your home equity. Borrowers with good credit will have access to lower interest rates.

In addition to your actual credit score, lenders will also pay attention to what’s on your credit report. If you’ve defaulted on a loan in the past or have frequent missed payments, you may struggle to get a loan.

The last thing you want is to apply for a loan and discover that your credit report and score make you ineligible. It’s worth checking your credit before you apply, so you know if you’ll run into any issues.

FAQs

Is getting equity out of my home a good idea?

Taking equity out of your home can be an excellent way to pay for home renovations or large expenses by borrowing against the equity in your home. Whether it’s a good idea for you depends on your financial situation.

How much equity can I get from my home?

Most lenders allow you to borrow up to 80 to 85% of the value of your home. You can calculate how much equity you have available by subtracting the amount you owe on your mortgage from your home’s appraised value.

Can you get equity out of your home without refinancing?

Yes, you can get equity out of your home without refinancing by using either a home equity loan or a HELOC.

How long does it take to get equity out of your home?

How long it takes to get equity out of your home depends on the type of borrowing tool you use. However, it may take as long as four to six weeks.

Key Takeaways

  • You can borrow against your home equity to pay for home improvements, debt consolidation, and more at a low interest rate.
  • The primary ways to get equity out of your home are a home equity line of credit (HELOC), home equity loan, and cash-out refinance.
  • There are several advantages to borrowing against your home equity, including the low interest rates, but there are also some risks to consider.

Which equity loan is right for you?

You can use the equity in your home to pay for renovations, consolidate debt, increase cash flow, or pay for another large expense. While it can be a great option for some homeowners, thanks to the lower interest rates, it’s not right for everyone.

An important part of borrowing against your home equity is finding the right lender. We’ve rounded up the best lenders for home equity loans, HELOCs, and mortgage refinances so you can find the best lender for your situation. Our comparison tool includes company reviews, loan amounts, interest rates, maximum loan-to-value ratio (LTV), and more.

View Article Sources
  1. What is a home equity loan? — Consumer Financial Protection Bureau
  2. Home Equity Loans and Home Equity Lines of Credit — Federal Trade Commission
  3. The Definitive Guide to Cash-Out Refinancing — SuperMoney
  4. Best Shared Equity Agreements | March 2022 — SuperMoney
  5. Reverse Mortgage vs. Home Equity Loan vs. HELOC: Pros & Cons — SuperMoney
  6. Is It Wise To Use A Home Equity Loan For Debt Consolidation? — SuperMoney
  7. What Is a Second Mortgage? (And How To Get One) — SuperMoney
  8. Home Improvement Financing: How to Finance Home Renovation (Updated 2022) — SuperMoney
  9. Home Equity Lines of Credit: Reviews & Comparisons — SuperMoney