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How to Get Equity Out of Your Home Without Refinancing
Key takeaways
- HELOCs and home equity loans let you tap equity without changing your first mortgage, offering flexible draws or predictable fixed-rate lump sums
- If the interest rate on your mortgage is below current market rates, you might prefer options that don't involve refinancing
- Personal loans do not involve home equity, but could provide needed funds relatively quickly
If you want to draw on the equity you have stored up in your home, you don't need to go straight to cash-out refinancing. After all, you might have very favorable terms on your mortgage that you don't want to lose by refinancing.
Instead of replacing your existing loan, consider these 4 ways to access home equity without refinancing—and one alternative option. One of these might be just what you need to build that deck, remodel a kitchen, or consolidate some outstanding credit card debt.
1. Home equity line of credit (HELOC)
One versatile way to access your home's value is by using a home equity line of credit. A HELOC gives you a line of credit to draw from as you need it.
What are the benefits of a HELOC?
HELOCs typically are more flexible than other options and offer several other benefits.
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Borrow only what you need. Unlike a lump-sum loan, HELOCs act more like a credit card. You draw funds as needed and are charged interest only on the amount you've withdrawn
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Interest-only payments during draw period. Some HELOCs allow you to pay only the interest charges for a set period (the draw period), commonly the first 10 years of the loan. This serves to lower monthly payments during that time
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Lower interest rates than personal loans or credit cards. Because it's secured by your property, a HELOC typically has lower interest rates than some other forms of credit. This helps save on interest charges over the life of the loan. You can find HELOCs with fixed interest rates or variable interest rates
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Flexible repayment. Some HELOCs provide the option of paying only the interest charges during the draw period and also paying down the principal balance. This could not only reduce overall interest costs, but also free up credit sooner, making it available for future needs
HELOCs are best for ...
Because you can draw on your home equity line of credit as you need funds, a HELOC is a great option for meeting several financial needs.
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Ongoing home improvements.
- HELOCs can offer a ready funding source for working on your house and even increasing its value.
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Emergency funds.
- An established line of credit can help you deal with unexpected medical bills, vehicle repairs, and other expenses.
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Major purchases over time.
- The costs of big-ticket items like a new car, family vacation, or tuition could be spread out over the loan period.
2. Home equity loan
A home equity loan (HELOAN) offers another way to tap home equity without refinancing.
You can borrow a lump sum, generally a percentage of your home equity. These loans typically have a fixed interest rate and set terms, perhaps 5 to 30 years. You will most likely be required to start making monthly payments as soon as you get the loan.
What are the benefits of a home equity loan?
This type of loan provides a set amount of money up front. With a fixed rate and loan term, you'll know how much your monthly payments and total payments will be. Here are several other positive elements of home equity loans:
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Fixed interest rate. You are insulated from rising interest rates
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Set monthly payments. It's easier to plan and budget monthly expenses
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Ideal for large, one-time expenses. If you have sufficient equity in your home, you could qualify for greater sums than might be available through credit cards, personal loans, or other sources
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Keeps your existing mortgage unchanged. Unlike a cash-out refinance, a home equity loan does not change your home mortgage. This might be especially important if you have a low interest rate on that mortgage
Home equity loans are best for ...
A home equity loan could be well-suited for situations where you need a specific amount of capital and prefer a set repayment schedule.
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Home renovations. HELOANs can be useful for major projects that have a contractor's quote in place, such as a kitchen remodel or roof replacement
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Debt consolidation. Because these loans are secured by your home, they tend to have lower interest rates than unsecured loans. You could use one to consolidate high-interest debt
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Medical bills. For unexpected medical expenses, a lump-sum home equity loan could help you quickly settle outstanding balances. It might offer better repayment terms than financing offered by medical providers
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Large, planned expenses. A HELOAN could fund major life events—weddings, milestone vacations, college education
Reverse mortgage (for homeowners 62+)
Older homeowners—age 62 and up—can use a reverse mortgage to turn equity in their home into ready funds while they continue living there.
The homeowner can get money as a lump sum, in regular monthly payments, or as a line of credit. The amount the homeowner owes to the lender increases over time—the reverse of a typical loan. The money must be repaid in full when the homeowner stops living in the home. That typically is done through the sale of the home by the homeowner or their heirs.
What are the benefits of a reverse mortgage?
A reverse mortgage can provide several benefits, including:
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No monthly mortgage payments. There typically are no monthly payments. The loan is repaid when the person stops living in the house
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Access to tax-free funds (consult a tax professional). Reverse mortgage proceeds could be considered as loan advances, rather than taxable income. To find out how a reverse mortgage could affect your tax returns, consult a tax professional
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Flexibility in payout. Borrowers typically have options for getting the funds, including a lump sum, fixed monthly installments, or a line of credit
Reverse mortgages are best for ...
Reverse mortgages can help to improve the financial stability of:
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Seniors needing supplemental income. The cash flow from a reverse mortgage could help cover daily expenses, healthcare, property taxes, and other necessities
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Retirees wanting to stay in their homes. For seniors who want to "age in place," a reverse mortgage could provide funds to maintain a home, modify it for better accessibility, and otherwise help them achieve that goal
A reverse mortgage can be a powerful resource, but it does reduce the amount of home equity a homeowner can pass to heirs. Fees, interest, and mortgage insurance also add up over the years.
4. Home equity investment (shared equity agreement)
In a home equity investment, also called a shared equity agreement, an investor provides a sum of money in exchange for a portion of your home's future value. It's not a loan, but an equity partnership—the investor wins as home equity increases.
What are the benefits of a home equity investment?
These agreements can provide liquidity without the pressure of quick repayment.
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No debt or monthly payments. Because it's an investment, not a loan, there's no debt to repay, nor interest charges. The investor receives a return when the agreement is ended
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Funds can be used for almost any purpose. There typically are few restrictions on how you can use the money. You could address a wide variety of needs, such as starting a business, education, paying off debt, buying a car
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Does not affect your current mortgage. The equity agreement is separate from any mortgage you might have. This can be advantageous if you have a low fixed rate you'd like to keep
Home equity investments are best for ...
This strategy could be useful to homeowners who have significant equity and prefer to avoid some of the costs and constraints of traditional bank financing.
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Homeowners with limited income. Homeowners with a large amount of equity but limited monthly cash flow could benefit from this arrangement
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Those who don’t want increased monthly payments. Homeowners could keep their existing lifestyle without taking new debt and monthly payments
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Borrowers who may not qualify for traditional loans. Home equity investment companies tend to place more emphasis on the home's value and location rather than the standards that lenders tend to use, such as income, credit scores, and debt levels
5. Personal loan
A personal loan is a type of financing that typically has a fixed rate and fixed term and provides a lump sum of funds. Because these loans typically are not secured by property, you don't need to put your home's equity at risk.
What are the benefits of a personal loan?
Personal loans offer a straightforward alternative to home-backed debt, with a more simplified application process, generally lower application costs, and predictable repayment plans.
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No collateral required. You don't need to use your home as collateral
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Fast funding. The approval process for a personal loan tends to be quicker than for home equity loans. Some lenders might provide funds in one to three business days
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Fixed-interest rates and payments. Personal loans typically come with fixed interest rates, making monthly payments stable for the life of the loan
Personal loans are best for ...
Personal loans are most suitable for individuals needing relatively quick access to funds who don't want to leverage their home equity.
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Smaller expenses. Lenders may offer personal loans for amounts as low as $500. Home-equity based options could have higher minimum loan limits
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Borrowers with strong credit. Personal loans are available to a wide range of borrowers, but those with higher credit scores might obtain more favorable terms
What to consider before accessing home equity
Before deciding to tap into your home's equity, examine your current commitments and future needs. Here are some key points to consider:
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Your current mortgage rate. If the interest rate on your mortgage is below current market rates, you might prefer options that don't involve refinancing
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Monthly payment flexibility. A HELOC may offer more flexibility on the size of monthly payments. Is that more important to you than having stable monthly payments over a fixed time, which you could get with a home equity loan?
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Total borrowing costs. Some options, like personal loans and home equity investments, are at the lower end of the spectrum. Home equity loans and HELOCs could have higher borrowing costs
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Variable vs. fixed interest rates. A variable-rate option might have a lower interest rate than a fixed rate option, making it more affordable at the outset. But rates could increase. What is your risk tolerance?
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How long you plan to stay in the home. If you plan to sell in the near future, the costs of a second mortgage might not be worth it
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Your long-term plans. Tapping your equity to finance home improvements is a popular way to increase property value. When you are planning to take equity out of your home, think about the long-term implications and your goals
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Whether you can handle a second loan. If you can't afford to make the payments on a second loan, that could limit your options
Choosing the right plan depends on your comfort with risk, your preferred payment structure, and your intended borrowing timeline. Consider all these factors as you assess what method is best for you.
How do property taxes and insurance affect mortgage affordability?
Homeowner insurance premiums and property taxes are typically paid monthly as part of the mortgage payment. The lender puts a certain amount each month in an escrow account and uses that money to pay insurance premiums and taxes when they are due.
This saves the homeowner the trouble of directly paying what can be rather large amounts. It also helps to mitigate the risk of insurance being cancelled or legal trouble ensuing due to payments being missed.
5 tips for increasing how much mortgage you can afford
If you are not happy with the results you get when you calculate the size of the mortgage you can afford, don't get discouraged. Here are 5 steps you can take to change things for the better.
1. Improve your credit score
Improving your credit score could save you thousands of dollars by helping you to qualify for a lower interest rate on your mortgage. A tiny fraction of a percentage point could have a big impact over the life of a 30-year loan.
Start by getting a copy of your credit score—to see where you stand—and your credit report—to see if there are any errors that should be corrected in your favor. Among the many things you could do to improve your score, some basic ones include:
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Make all payments on time
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Pay down credit card balances
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Keep old accounts open
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Avoid opening multiple new accounts quickly
2. Lower your DTI ratio
This goes hand-in-hand with paying down credit card balances. In the months or years leading up to a home purchase, you could focus your resources on paying down your debts.
It's not easy to address the other side of that debt-to-income ratio—your income—but it's possible that you, and possibly your partner, could increase your regular income and reap the long-term benefits with a more affordable mortgage.
3. Save for a larger down payment
The actions you take based on those first two tips could help you here, too. Making payments on time helps you avoid late fees. Paying down credit card balances and other debt helps to minimize interest charges. That, along with any extra income you add, could help you save money to make a larger down payment.
4. Compare multiple lenders
Lenders offer a wide range of options for mortgages, including affordable mortgage programs with low down payment options.
There could be one in particular that offers the terms that best suit your needs, but how will you find it if you don't shop around?
One place to start is the bank you already have a relationship with. Your bank might offer better mortgage terms for customers who meet certain requirements.
5. Consider first-time buyer programs
If you are a first-time home buyer, look for mortgage programs designed specifically for your situation.
Banks may offer down payment assistance programs and community second mortgages. Other options designed to help people obtain affordable mortgages include FHA loans, VA loans, and FNMA 97 Mortgages.
Common affordability mistakes to avoid
The term "house poor" is used to describe someone who pays so much for their housing that they are hard-pressed to cover other expenses and discretionary spending. To avoid that situation, look out for these common pitfalls.
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Focusing only on mortgage payment and ignoring taxes/insurance. Taxes and insurance can add a considerable amount to your monthly house payment. They also could rise year over year, which makes it even more important to factor them into your budget
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Forgetting repair and maintenance costs. Your home will require upkeep and repairs. The work could be quite expensive, too. Some experts recommend budgeting 1% to 3% of your home's value each year for upkeep and repairs
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Buying at the top of your budget with no safety margin. Unexpected life events or job changes can be very stressful. A mortgage that is barely affordable in good times could add to your stress in difficult times
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Assuming you need to spend the full amount you qualify for. Lender approval limits could exceed what's actually comfortable for your personal spending habits and budget. The approved limit might not account for any of the pitfalls we just reviewed
FAQs
Homeowners could access equity through a home equity line of credit or a home equity loan, which are types of second mortgages. For those 62 or older, a reverse mortgage could provide tax-free funds without the need for monthly installments. Additionally, a home equity investment could provide a lump sum in exchange for a portion of your home's future appreciation. These tools could help you achieve certain goals while leaving your primary mortgage terms untouched.
Leveraging home equity generally involves using your property as collateral. This could involve risk if your financial circumstances change unexpectedly or something occurs to impact the value of your house.
However, choosing a product with predictable, fixed payments could provide significant stability and help better manage household budgets effectively.
The requirements vary according to the financing method and the institution you are working with.
Lenders typically require you to have at least 15%-20% equity in your property to qualify for a HELOC or a home equity loan. Home equity agreements typically require homeowners to have more equity, perhaps a minimum of 20%-30%. To qualify for a reverse mortgage, you might need to have about 50% equity.
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