You can cash out home equity without a refinance
If you need a large sum of money and you’re wondering how to get equity out of your home without refinancing, there are a few alternatives worth considering.
You can tap your equity through a variety of methods, including home equity loans, home equity lines of credit, home equity investments, to name a few. You may be tempted by a cash-out refinance, but it isn’t the only option you have to leverage your home equity.
Here’s what you should know about pulling equity from your home without refinancing.Check your best options to tap home equity. Start here
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What is home equity?
Simply put, home equity represents the portion of your home that you truly “own.” Your home equity is calculated as the difference between the current appraised value of your property and the remaining balance on your mortgage.
For example, imagine you purchased a home valued at $300,000. You made a down payment of $60,000 and financed the rest. At this point, your initial home equity is $60,000 – the amount you paid upfront.
Over time, as you continue making mortgage payments, this equity increases. Each payment reduces the mortgage balance, thereby increasing your ownership stake in the property.
Additionally, your home’s equity can grow as its market value appreciates. This could happen due to general real estate market improvements or through enhancements and renovations you make to the property.
For instance, if after a few years, the market value of your home rises to $350,000, and your mortgage balance is down to $220,000, your home equity would now be $130,000 ($350,000 market value minus $220,000 mortgage balance).
Understanding and building home equity is vital, as it can provide financial flexibility, allowing you to secure loans such as home equity lines of credit (HELOCs) or home equity loans, which can be used for various purposes like home improvements, consolidating debt, or financing major expenses such as medical bills or education.
Can you pull equity out of your home without refinancing?
Absolutely. You can tap into your home’s equity without refinancing your existing mortgage.
Home equity loans and Home Equity Lines of Credit (HELOCs) are popular choices that let you borrow against your home’s equity while keeping your original mortgage intact.
A home equity loan, often dubbed a “second mortgage,” is a popular choice. It allows you to borrow against the equity you’ve built in your property, providing you with a lump sum of cash to use as you see fit.
HELOCs, on the other hand, function similarly to a credit card, where you can borrow money as needed up to a certain limit. Both options typically have lower interest rates compared to other types of loans because they are secured by your home’s value.
Home equity options other than refinancing include reverse mortgages, sale-leaseback agreements, and home equity investments. Remember, each choice has its own merits and potential drawbacks, so it’s crucial to thoroughly evaluate and make an informed decision to suit your financial needs and goals.
How to get equity from your home without refinancing: 7 strategies
If you already have a low, fixed-rate mortgage, or if you’re well on the way to paying off your current mortgage, a cash-out refi might not make sense. Instead, you can consider a home equity line of credit (HELOC) or a home equity loan. These “second mortgages” let you cash-out your home’s value without refinancing your existing loan.Check your best options to tap home equity. Start here
But there are a few other lesser known ways to tap home equity without refinancing. Here is what you should know.
1. Home equity line of credit (HELOC)
A home equity line of credit, or HELOC, offers a better financing strategy for borrowers who want to keep their primary mortgages intact.
A HELOC resembles a credit card, except the loan is backed by your home value which allows the lender to charge a much lower interest rate.
You’d draw from the line of credit as needed and then repay the balance by making monthly payments. During your HELOC’s draw period, which can last up to 10 years, you can borrow and repay funds as needed.
All the while, you’d keep paying your existing mortgage payments along with the new HELOC’s monthly payment. Note that during the HELOC draw period, you pay interest only on the outstanding balance charged to the line (not the full credit limit).
This type of loan works well when you don’t need a large lump sum for a big purchase or project.
With its lower closing costs and added flexibility, a HELOC is usually less costly than a cash-out refinance, and it takes less time to close. There aren’t limitations on its use, and you only pay interest on the amount of credit used.
You can use the funds for any purpose, including home improvement projects, annual costs like college tuition, or financing a gap in business revenue.Check your HELOC options. Start here
2. Home equity loan
A home equity loan resembles a personal loan except the loan will be secured by your home equity, so you should get a lower interest rate.
Just like with a HELOC, you’d keep making your current monthly mortgage payments while adding a second payment for the home equity loan.
Unlike a HELOC, a home equity loan pays out a lump sum upfront and requires fixed monthly payments until you pay off the loan balance.
Home equity loans work well when you’re making home renovations or paying off existing high-interest debt, but lenders don’t limit how you spend the money. You could use the money to buy a car or make a down payment on a vacation home, for example.Check your home equity loan options. Start here
3. Home equity investments
Home equity investments, also known as home equity agreements or HEAs, provide a way to access the value in your home without adding to your debt. In such an arrangement, an investor purchases a percentage of your home’s equity based on its current market value. This agreement typically lasts for a period of 10 to 30 years.
At the end of the agreed term, or if you choose to sell your home or refinance, the investor will recoup their investment based on the value of their share in your home. One of the major benefits of this approach is the absence of monthly or interest payments, though a service fee may apply.
To be eligible for a home equity agreement, a substantial amount of equity is usually required, with most agreements offering a loan-to-value ratio of 75% to 85%.
This method of leveraging home equity can be particularly beneficial for those who need a large sum of money quickly but can’t afford extra monthly payments or for individuals with lower credit scores.
4. Refinance your first mortgage and get a second mortgage
Even if you need both features of a cash-out refinance — a new mortgage and an equity-backed cash loan — a cash-out refi may not be your best deal.
Depending on the amount of cash you need, it might be less expensive to separate the two elements of a cash-out refinance into two separate loans. You’d:
- Refinance your first mortgage with a cheaper rate-and-term loan
- Add a second mortgage (HELOC or home equity loan)
If you have an FHA, USDA, or VA loan, you may be able to save even more with a Streamline Refinance loan — a loan that lowers your rate or monthly payment without checking your credit score or appraising your home.
If you have a conventional loan and can’t get a Streamline Refinance, you may still save with this strategy since refinance rates are lower with no cash-out loans.
Then, your second loan — a HELOC or a home equity loan — could generate the extra amount of money you need.Check your best options to tap home equity. Start here
5. Other sources of cash
Mortgage loans use your home as collateral, so mortgage interest rates tend to be lower than the rates you’d pay on other forms of borrowing. They’re especially lower than rates on credit cards and personal loans which require no collateral.
But a loan against your home equity is still a big loan that will need to be repaid over a long period of time. Depending on your specific needs, accessing another source of cash may be a better plan for you.
For example, if you have vehicle loans at high interest rates, see if you can refinance them. That will give you lower payments and you can use the savings to pay other debt.
Consider selling valuable collections, luxury items or things you’re not using. If credit card debt remains after selling assets, consider consulting a credit counselor about restructuring that to achieve more manageable personal finances. They also can help you develop better spending habits.
Consider starting a side hustle using high-demand skills you already have. Look for ways to generate income in the gig economy but carefully research their costs and legal requirements.
Alternatively, you could explore options like borrowing from family, using zero-interest balance transfer credit cards, or borrowing against your 401(k) with deductible payments from your paycheck.
These options could reduce your debt load or give you better terms than cash-out refinancing.
6. Sale-lease agreements
A sale-leaseback agreement is a viable method for accessing your home equity without refinancing. In such a deal, you sell your home to another party and receive 100% of the accrued equity. Rather than vacating, which is common in standard sales, you lease the property back from the buyer and continue living there, renting at market value.
Unlike home equity loans or cash-out refinancing, which are typically used when homeowners intend to reinvest in their properties, a sale-leaseback agreement allows homeowners to utilize their equity as per their individual needs and lifestyles.
Notably, some sale-leaseback agreements may burden homeowners with costs associated with ownership, such as property taxes and maintenance, even post-sale. However, certain providers cover all these costs, including insurance and repairs, relieving homeowners of such obligations.
Given that sale-leaseback agreements are not second mortgages like home equity loans or lines of credit, credit requirements don’t restrain homeowners from accessing their equity.Check your best options to tap home equity. Start here
A sale-leaseback agreement may not be appealing to everyone for a variety of reasons. In such an arrangement, homeowners lose ownership of their property, which means they will not benefit from future increases in property value, which can be a significant wealth-building tool. Furthermore, while the arrangement can release a significant amount of equity, it does impose the obligation of monthly rent payments, which may not be financially beneficial in the long run for some homeowners.
7. Reverse mortgages
A reverse mortgage is a special type of home equity loan. It allows homeownership to be leveraged by converting a portion of their equity into cash, without the need for refinancing. The unique aspect of a reverse mortgage is that, unlike traditional mortgages, where the homeowner pays the lender, in a reverse mortgage, the roles are reversed, and the lender makes payments to the homeowner.
This option is specifically available to homeowners who are 62 years of age or older, allowing them to tap into their home’s equity without needing to sell their home or take on additional monthly payments. The loan becomes due when the homeowner moves out, sells the house, or passes away.
However, a reverse mortgage may not be suitable for everyone. The fees and interest associated with reverse mortgages can be high, and the loan balance increases over time as interest on the loan and fees accumulate. This means the amount you owe grows as the interest on the loan adds up, potentially consuming the equity in the home over time and leaving less for your heirs.
Moreover, if the homeowner doesn’t meet the obligations of the loan terms, such as maintaining the home and paying property taxes and insurance, they risk foreclosure. It’s also important to note that the amount you can borrow with a reverse mortgage is determined by several factors, including your age, the value of your home, and the interest rate, among others, which may limit the amount of equity you can access.
Pros and cons of refinancing
When considering options to tap into the value of your home, it’s essential to understand the potential benefits and drawbacks of refinancing. Let’s break them down:
Pros of refinancing:
- Lower interest rates: If you secure a refinance loan with a lower interest rate than your original mortgage, you can save money over the life of the loan
- Fixed interest rate: Refinancing can allow you to switch from a variable interest rate to a fixed interest rate, providing more predictable monthly payments
- Longer loan terms: Refinancing can extend your loan terms, reducing your monthly payment burden
- Cash out: If your home has appreciated in value, you can do a cash-out refinance to use home equity and get a lump sum payment
Cons of refinancing:
- Closing costs: Refinancing a mortgage involves costs similar to those you paid for your original mortgage
- Longer repayment: Extending your loan terms means you’ll be in debt for a longer period
- Foreclosure risk: If for any reason you cannot meet the new mortgage payments, you risk foreclosure on your home
What to consider before a cash-out refinance
A cash-out refi is a powerful tool. It may be exactly what you need to build a stronger financial foundation going forward. If so, the closing costs and higher interest rate will be worth the cost.
But before applying for this type of mortgage refinance option, make sure you understand the details. Here are a few key points to be aware of.Check your cash-out loan options. Start here
1. How much cash can you withdraw?
Fannie Mae and Freddie Mac set the rules for conventional loans. And they limit the amount of cash you can withdraw from your home equity.
Cash-out refinancing has a loan-to-value limit of 80%. This means you’d need to leave 20% of your home’s current value untouched. If your home was worth $300,000, your new loan amount couldn’t exceed $240,000.
This new $240,000 loan would need to pay off your existing loan. Then, your cash-out would come from what’s left over. If you owed $230,000 on your existing loan, you could get only $10,000 in cash back.
Many homeowners don’t have enough equity to pay off their current loan, leave 20% of equity in the home, and get cash back.
There is one exception to this convention. The VA cash-out refinance can allow borrowers to access 100% of their home’s equity, bypassing the 80% LTV rule. Only veterans, active duty service members, and some surviving military spouses can get VA loans.
2. Do you meet cash-out underwriting guidelines?
A cash-out refinance is not a source of quick cash; it’s a large loan secured by your home. As a result, underwriting and eligibility guidelines are stricter for these loans and they can take longer to close than shorter-term financing.
Conventional loan lenders look for higher credit scores with cash-out refinancing: Home buyers can get approved with FICO scores as low as 620. For cash-out refinancing, lenders often want to see credit scores of at least 660.
It is worth noting that you can avoid the surcharges and stricter underwriting by choosing government-backed refinance options like FHA and VA.
However, those programs have their own sets of upfront mortgage insurance fees. FHA also charges annual mortgage insurance on all cash-out refinance loans, whereas a conventional cash-out loan has no PMI. So these may not make sense if you have significant home equity.
3. Are you comfortable changing your loan amount and term?
Cash-out refinancing means you’ll have a bigger mortgage and probably a higher payment. You’ll also burn up some home equity, which is an asset just like your 401(k) or bank balance.
This is not something to do lightly.
In addition, taking a cash-out refinance means resetting the clock on your home loan. You pay more over time by adding those extra years and interest to a new mortgage.Check your best options to tap home equity. Start here
4. How will you manage your finances after cashing out?
If the reason for your cash-out refinance is debt consolidation, consider other options before you take out this type of refinance loan.
This is especially true if you’re consolidating consumer debt. Depleting home equity to pay off debt accrued buying things that don’t outlast the debt can be risky.
In addition, it can be tempting for some borrowers to run up their cards again and accrue new debt after paying off the old liens. Then they might need another cash-out refi to pay off the new debt, creating a vicious cycle.
That doesn’t mean a debt-consolidation refinance is always a bad idea. It just means you need to have a careful plan in place before doing so.
Talk to a financial advisor about how you plan to pay off your debts and have a clear roadmap in place for better money management after the debt consolidation is complete.
When is a cash-out refinance the best option?
A cash-out refinance may be your best choice when:Check your best options to tap home equity. Start here
- You need cash for a long-term investment such as home renovations or other real estate transactions
- You have plenty of home equity
- Your current mortgage rate exceeds the rate you could get now
- You have a strong credit profile
- You’re a veteran who can get a 100% VA cash-out refinance
Ask lenders to show you other options and help you compare costs when you’re considering cash-out refinancing.
Downsides of a cash-out refinance
Any type of refinance loan requires closing costs. These costs usually range between 2% and 5% of the new loan amount and include legal fees as well as origination fees.
The larger your loan, the more you’ll pay in closing costs. Since cash-out refinances usually have larger loan amounts, closing costs are higher.Check your best options to tap home equity. Start here
A cash-out refinance is large because the new loan amount has to covert:
- A new mortgage loan that pays off your existing mortgage balance, and
- A cash loan that’s secured by your home equity — the part of your home value that exceeds your current mortgage debt
Along with higher closing costs, cash-out refis usually charge higher interest rates because the lender faces more risk of default.
Paying more may be worthwhile when you need both features of a cash-out refi: The new mortgage and the cash-out loan. But if you don’t want to refinance your existing home loan, a cash-out refinance may not be the right choice.
FAQ: How to get equity out of your home without refinancingCheck your cash-out loan options. Start here
Yes, there are options other than refinancing to get equity out of your home. These include home equity loans, home equity lines of credit (HELOCs), reverse mortgages, Sale-Leaseback Agreements, and Home Equity Investments. Each of these options allows you to tap into your amount of equity without having to refinance your existing mortgage.
Whether or not it’s a good idea to take equity out of your home depends on your personal financial situation and goals. If used wisely, equity can be a valuable resource for funding large expenses such as home improvements, which may increase the property value, or for purchasing an investment property. However, it’s essential to remember that your home is the collateral for the loan. If the repayment period is not managed well, it could lead to foreclosure. It’s also important to consider the effect on your debt to income ratio.
Home equity is the difference between your home’s market value and the outstanding balance of your mortgage. As you pay down your mortgage or if your property value increases, your home equity—the portion of your home you truly “own”—increases. Your equity can be calculated by subtracting the amount owed on any loans against your property from its current market value.
Yes, there are risks to consider when taking out a home equity loan. The most significant risk is that if you fail to meet the repayment terms, you could lose your home to foreclosure. The loan terms may also include variable interest rates, which can lead to higher payments if interest rates rise. If you have bad credit, the terms of the loan may not be favorable.
Refinancing involves replacing your existing mortgage with a new one, often to reduce your interest rate or change your loan term. A home equity loan, on the other hand, is a separate loan that you take out in addition to your mortgage. It allows you to cash out your equity without refinancing the original mortgage. The amount you can borrow with a home equity loan is based on the amount of equity you’ve built up in your home.
A reverse mortgage is a type of loan for homeowners aged 62 or older that allows them to convert a portion of their home equity into cash. Unlike a traditional home loan where the borrower makes payments to the lender, in a reverse mortgage, the lender makes payments to the borrower. The loan is repaid when the borrower moves out of the home, sells it, or passes away. It’s important to note that a reverse mortgage can affect the inheritance left for heirs and comes with its set of fees and interest.
Final thoughts on getting equity out of your home without refinancing
If you’re aiming to consolidate debt, upgrade your home, or increase your financial flexibility, using your home equity can be an effective strategy.
Start by determining your home’s current value and calculate your loan-to-value ratio to evaluate eligibility for a home equity loan or a HELOC.
The key is to use this equity for purposes that offer financial returns, such as paying off high-interest debts or investing in value-boosting home improvements. It’s important to have a repayment plan in place.
Lastly, compare different lenders to find the best option for your needs. You can begin that process by clicking on the links below.Time to make a move? Let us find the right mortgage for you