Whether you’ve paid off your mortgage or you’re one of the millions of homeowners who benefitted from equity gains in recent years, getting equity out of your home without a refinance is possible. You might need money for a home renovation project, or to pay emergency medical expenses for a loved one. Regardless of the reason, read on to understand how to get equity out of your home without refinancing.
Can You Get Equity Out of Your Home Without Refinancing?
Yes, it’s possible to get cash out of your home with refinancing. You can have the options of a home equity loan, home equity line of credit (HELOC), home equity investment, a sale-leaseback or a reverse mortgage.
5 Ways to Access Home Equity Without Refinancing
You can get equity out of your home without refinancing in several ways. the most common are HELOCs, home equity loans or home equity investments. Here’s how each of those works.
1. Home Equity Loan
A home equity loan is a type of loan that allows you to access the equity you’ve built up in your home and use the home as collateral. You’ll receive a standard lump sum. A home equity loan is a good option for homeowners who need a large lump sum for anything from a renovation project to medical expenses or as a downpayment for another property.
With a home equity loan, you’ll have fixed monthly payments to repay the loan, plus interest, in installments over time. Home equity loans have fixed interest rates that don’t change over the life of the loan. If interest rates drop significantly throughout your repayment period, you may have the option to refinance your loan.
To get a home equity line of credit, you’ll need to apply for the loan through a bank, credit union or online lender. With a home equity loan, your interest payments may be tax deductible if you use them for qualifying home improvements.
Advantages of a home equity loan include easy access to a lump sum payment, fixed monthly payments and flexibility to use the money for whatever you want. The disadvantage of getting a home equity loan instead of refinancing is that you may pay a higher interest rate on that sum of money, and you’ll lose equity in the home.
An alternative, especially for retirees or those who have already paid off the loan in full, is a reverse mortgage. A reverse mortgage is a type of specialized home equity loan. In this case, instead of getting a lump-sum payment, the borrower will receive set monthly payments against the equity built up in the home.
2. Home Equity Line of Credit (HELOC)
A home equity line of credit gives borrowers the most flexibility to access funds when they’re needed. A HELOC is a type of second mortgage with a revolving balance. Instead of receiving a lump sum, you borrow only what you need, pay it off and then borrow again. A HELOC functions similarly to a credit card, but with lower interest rates. You’ll make payments based on the amount of credit you use, rather than the available loan amount.
After applying for a HELOC and getting approval, you will usually receive a debit card or checkbook to easily access funds.
A major advantage of HELOCs is that they usually come with no closing costs. They also often have a discount at the beginning of the loan term that increases after six to 12 months. In addition, HELOCs are usually divided into two stages, the draw period and the repayment period. The draw period may last five to 10 years, while the repayment period could last as much as 10 to 20 years.
The disadvantage of getting a HELOC instead of refinancing is the variable interest rates, which can make repayments unpredictable. Likewise, when you use funds from a HELOC, you’re directly withdrawing from the home equity, reducing the equity you’ve built in your home.
3. Reverse Mortgage
A reverse mortgage is a type of loan that allows homeowners who are 62 years old or older to borrow against the equity in their home, with the loan being repaid when the borrower sells the home, moves out, or passes away. By leveraging the equity in your home through a reverse mortgage, you can receive a lump sum payment, a line of credit, or monthly payments to use as you see fit without having to make monthly mortgage payments.
One of the key benefits of a reverse mortgage is that it allows you to tap into the equity you have built up in your home over the years without having to sell or refinance. This can be particularly beneficial if you are a retiree who may not have a steady income but have accumulated significant equity in your home. By accessing this equity, you can supplement your retirement income, pay off debt, cover healthcare expenses, or make home improvements without taking on additional monthly payments.
However, it is important to carefully consider the terms and potential risks associated with a reverse mortgage, as there are fees and interest charges that accrue over time and can impact the equity remaining in the property.
4. Sale-Leaseback Agreement
A sale-leaseback agreement allows you to sell your home to an investor or another person and receive 100% of the accrued equity. In this type of arrangement, instead of having to move, you’ll continue to live in the home and pay rent to the new owner at current market rate.
A sale-leaseback agreement allows homeowners to use equity for anything, but you’ll lose equity and ownership in the home in exchange for that lump sum. In some cases, the original owner must still pay for property taxes and maintenance, even post-sale. Some sale-leaseback agreement providers will cover the costs of insurance and repairs.
The advantages of a sale-leaseback agreement include access to cash and relief from additional burdens of home ownership like repairs and insurance. The seller loses equity and the possibility for future increases in property values, which means you’ll lose out on future financial gains.
5. Home Equity Investments
The final option to access equity in your home is through home equity investments. Home equity investments are a newer method of liquidation to access equity in which you sell off a portion of your future home equity in exchange for a one-time cash payment.
A home equity investor is a private investor who offers homeowners cash for a percentage of the future value of the home. Suppose you have a home worth $500,000 with $200,000 in equity built up. The investor might offer you $100,000 in exchange for a 20% share in the future appreciation of the home. Terms vary, but home equity investments are often 10 years or more. If in 10 years the home is worth $750,000, you’ll have to repay the investor $100,000 plus 20% of $250,000 — the value of the appreciation — or $50,000. That means that at the end of 10 years, you’ll need to pay back $150,000.
The advantage of this arrangement is that you get access to equity in the home without taking on formal debt or needing to make monthly payments. The disadvantage is that you’ll essentially have a silent partner in your home, who has the right to protect their investment and will expect repayment in full at the end of the agreed term.
How to Determine the Amount of Equity You Can Access
To determine the amount of equity you can access, you need to calculate the amount of equity you’ve built up by paying for the principal of the home loan. For example, if you purchased the home with a mortgage for $250,000, and have paid $100,000 toward the principal of the home, you’ve built $100,000 in equity.
Most lenders will offer up to 80% of the equity in the home or an 80% loan-to-value ratio, depending on the lender. Lenders look at the current home value, total equity, the loan-to-value ratio, the borrower’s credit score, debt and income to determine the maximum loan amount.
A VA cash-out refinance is the exception. It allows borrowers to access up to 100% of their equity but is only available to veterans, active duty service members and some surviving military spouses.
How to Use the Funds Obtained from Home Equity
You can generally use the funds from home equity for various purposes, such as home improvements, debt consolidation, education expenses or for starting a small business. The interest on funds from a home equity loan that is used for qualified home renovations may qualify for a tax deduction on interest payments.
How Long Does the Process of Getting Home Equity Take?
The time to access home equity varies depending on your chosen option. It could vary from a few weeks to two months. In some cases, you might get home equity loan approval within a few days. The speed of the process can depends on how prepared you are before applying and what information the lender needs to assess the home’s value and underwrite the loan.
Should You Take Equity Out of Your Home?
A home equity loan, HELOC, home equity investment or sale-leaseback agreement offers homeowners options to access cash and improve short-term cash flow. While some financial experts say you should only take equity out of your home to make renovations or investments that will increase in value, there are no limitations on most equity loans. You could use the money for debt consolidation, to pay for college, renovations or medical bills. Carefully weigh the pros and cons of taking equity out of your home and consider other options. You can find refinance options or ways to finance an investment property here.
Frequently Asked Questions
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Yes, you can access home equity if you have a low credit score, but the required score varies by the lender. You will also need sufficient equity built up in the home. If you can improve your credit score before applying, you may be able to borrow more or get a better interest rate.
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Accessing home equity can cause your credit score to dip. For most borrowers, the drop is not huge, and the score can be rebuilt by on-time loan repayment over time.
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When you access home equity without selling the home, you don’t have to pay capital gains taxes. You may also get other tax benefits if you use the funds for qualified renovations.
