Wondering how to get equity out of your home? We’ll discuss several alternative ways you can access equity out of your home.
The ability to build equity draws many people to homeownership. After all, it functions as the ultimate financial safety net and resource without having to get a personal loan. But exactly what does home equity mean? Simply put, equity is the difference between what your home is worth, and what you owe on your current mortgage.
To that end, the amount of equity you have in your home builds over time, and it serves as a valuable financial asset.
When you think of taking equity out of a home, many people automatically envision having to sell their primary residence and move. While putting your asset on the market—especially when the housing market is high—is always an option, there are also several other ways to extract equity out of your home without having to put you and your family through a major life change.
If you’re wondering how to get money out of your home equity investment, without having to leave the home you love, we’re here to explain six alternative financial solutions:
- Home equity loan
- Home equity line of credit (HELOC)
- Cash-out refinance
- Reverse mortgage
- Shared appreciation company
- Sale-leaseback program
Why Converting Equity May Be Right for You
Every homeowner’s situation is unique, and there are many reasons you may want to convert your home’s equity you’ve worked hard to build into accessible funds. In which case, consider these common examples of how to use home equity if you need extra capital on hand:
- Debt consolidation of credit card debt, car loans, school loans, etc.
- Home improvement and repairs
- Sending your child to college
- Launching a small business
- Handling an unforeseen expense like a medical bill
The beauty of home equity conversion is that you can use the resources to meet your family’s individual needs—whatever they may be. However, it’s critical to keep in mind that different options come with their own set of risks and rewards.
This is especially true if you choose a more traditional option like a home equity loan (second mortgage), home equity line of credit (HELOC), cash-out refinancing, reverse mortgage, or shared appreciation company.
Let’s take a closer look at how to take equity out of your home.
1. Home Equity Loan
What is known as a home equity loan, or second mortgage, is a type of secured loan that’s based on how much equity you’ve already built.
To access home equity loans or second mortgages, the loan balance is fixed and you receive the funds in a lump sum payment once your application is approved. Once you’ve received the funds, you’ll be responsible for paying them back based on a fixed interest rate and schedule of interest payments, in a structure that’s similar to fixed mortgage rates.
Home equity loans can be used for one-time expenses, such as improvements, debt consolidation, or medical bills. You can also use home equity to pay off student loans or other types of debt.
Although these types of loans can be an effective option, it’s important to note that the total loan amount you can borrow is directly linked to how much equity you have in your home, as well as your credit score. If you’re a new homeowner who hasn’t had time for their equity to accumulate, or you don’t have a high enough score or have bad credit, this may not be the right fit for you. Just be sure to fully weigh out the pros and cons of home equity loans before you make a decision.
2. Home Equity Line of Credit (HELOC)
A home equity line of credit, frequently referred to as a HELOC in the finance world, is one of the most common mortgage refinancing and home equity loan alternatives. These two are often compared but there are clear differences between a home equity loan vs. HELOC. A HELOC loan is essentially a credit card where your credit limit is directly linked to equity in your home. It serves as a revolving source of funds, which means you can take out funds, pay them back, and repeat as needed.
Here’s are some things to keep in mind if you’re considering this option:
Home Equity Draw and Repayment Periods
The terms of a HELOC loan are broken down into two parts—the draw period and the repayment period. The draw period is a set period (usually between five and ten years) when you can withdraw funds, while only being responsible for paying interest. At the conclusion of the draw period, you’ll enter the repayment period, which is when you are then responsible for paying both the principal and interest amounts.
Variable Interest Rates
HELOCs have a variable interest rate, making it difficult to budget accordingly and ensure you can afford your payments. The variable interest rate makes HELOCs a risky option because it’s impossible to predict what the market and economy will look like in the future.
One of the most distinguishing features of a HELOC is that instead of taking out a large sum at once, you convert equity as you need it. This can be advantageous because you won’t pay interest on funds you don’t end up using.
However, it can also lead to a considerably slippery slope of overspending and accumulating debt.
3. Cash-Out Refinance
The best way to understand a cash-out refinance loan is to think of it as a way to pay off your home’s existing mortgage with a higher one. With this option, the difference in value will go directly into your pocket, and you can use the funds as needed. It’s essentially starting the original mortgage process again since you’ll be responsible for new interest rates, loan term modifications, and payment schedules.
How does cash out refinancing work? Lenders determine how much cash you’ll be able to access based on:
- How much equity you have in your home
- Your credit history
- Bank or mortgage lender standards
Converting equity through this type of mortgage refinance can be an attractive option since it often comes with better loan term stipulations and lower interest rates. That said, the fees, approval process, and qualification standards associated with a cash-out refinance loan put this option out of reach for many homeowners. Just be sure to weigh out the complete pros and cons if you’re choosing between a cash-refinance vs. a home equity loan or other options.
4. Reverse Mortgage
Ever thought of using home equity for retirement? If you’re over the age of 62, you may be eligible for a reverse mortgage. If your net worth is wrapped up in your home equity, but you’d like to have access to extra capital during your retirement, this can be a great option.
What is a reverse mortgage, exactly? A reverse mortgage loan is complex, and the best way to conceptualize how one operates is in the name itself—they’re a mortgage that works backward. Instead of paying a fixed monthly mortgage payment to the mortgage lender, the lender sends you a monthly payment.
This can be in the form of:
- A monthly payment
- A lump sum
- Term payments
- A line of credit
- A combination of these structures
Since many older homeowners have limited income, the funds from a reverse mortgage loan can help make ends meet and make life more comfortable. However, they also come with a higher interest rate and may not be suitable for everyone.
As you age, your debt goes up and your equity goes down, which is why this method of converting equity is designed specifically for older homeowners. If the borrower moves or dies, the proceeds of the sale go towards paying back the reverse mortgage. If you’re younger than 62, there are other alternatives to reverse mortgages that you can consider.
5. Shared Appreciation Companies
If you’re wondering how to get equity out of your home without taking out a traditional home loan or personal loan, using a shared appreciation company may work for your circumstances. These companies essentially act as silent partners and purchase a portion of your home.
They also purchase a portion of its future appreciation, and in return, they give you the cash you have as equity in your property. At the end of the loan term, not only do you have to pay back the equity you took out, but you also have to pay for the agreed-upon portion of your home’s appreciation. These agreements are complicated, require you to pay for an appraisal at the end of the term, and are risky because you never know when a housing boom is on the horizon.
You should only use a shared appreciation company if you feel confident you’ll be able to pay back the large sum looming at the end of the repayment term.
6. Equity Release Mortgage
An equity release mortgage is a financial product designed to allow older homeowners (typically over the age of 55) to access the equity tied up in their homes. There are two different types of equity release mortgages available: lifetime mortgages and home reversion mortgages.
A lifetime mortgage is the most common form of equity release. With this type of mortgage, a lump sum of money is released from the value of the property and the homeowner does not have to pay it back until they pass away or move into long-term care. The loan plus the interest is repaid either from the sale of the house or from the estate of the deceased.
Home Reversion Mortgage
A home reversion mortgage is less common and only available to people aged 65 and over. With this type of mortgage, the homeowner sells all or part of their property to a lender in exchange for a lump sum or a regular income. Upon death or moving into long-term care, the property is then sold and the proceeds are used to repay the loan plus interest.
Equity release mortgages can be a great solution for older homeowners who need extra funds but don’t want to leave their property, but their pros and cons should be carefully considered.
If you’re worried about the risks, interest rates, or application requirements inherent in the methods we’ve discussed so far, don’t worry. One of the most effective options for how to get equity out of your home without refinancing or home equity loan alternatives is a sale-leaseback program.
How does a sale-leaseback work ? The premise of this home equity loan alternative is as simple as it sounds. It allows you to sell your house, converting your equity to cash without having to take out a home loan or move out.
What are some sale-leaseback benefits? When you sell your house to a sale-leaseback provider, you convert your home’s equity to the cash you need, while getting to stay in it for as long as you need as a renter. Depending on your goals, you can even retain the option to buy back your property when you’re ready. If you decide to move, some providers can help you sell the home on the open market to access any remaining value and any appreciation.
There are several different ways to get the equity out of your home. When deciding which one would work best for your needs, do thorough research and talk to a financial advisor. If a sale-leaseback sounds like it might be the best solution for you, check out what programs may be available to you today to get started.