Updated for accuracy and relevancy on September 22nd, 2023
Taking equity out of your home is possible without refinancing. There are several ways to do this, and accessing your home's equity can provide financial freedom opportunities. Discover three ways to tap into your home’s equity while maintaining its value: a home equity loan, a home equity line of credit (HELOC), or a sale-leaseback. By choosing the option that best suits your needs, you can enjoy the feeling of cracking open your personal finance “piggy bank” and reaping the rewards of all your savings.
Unlocking your home’s equity is like unlocking a treasure trove of financial possibilities. Whether you need to make repairs, invest in a business, or pay off debt, using your home’s equity can be a smart and easy way to access funds. And the best part? You don’t need to refinance your mortgage to do it!
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What Is Home Equity?
Before we explore how to get equity out of your home without refinancing, let’s first explain what home equity is. Home equity is the difference between a home’s value and the amount owed on the home. From the moment a real estate buyer purchases a home and starts chipping away at their debt, they begin accruing equity in their home through their downpayment and monthly existing mortgage payments. Considering the average American monthly mortgage payment was $1,487 in 20191, this real estate equity can accumulate far more quickly than the occasional coin dropped into a piggy bank.
Given that home equity is calculated using the home’s value and not a straight debt-to-equity ratio, home value adds 2 — which can be financed using home equity — can also help homeowners accrue equity. Therefore, home equity can be an incredibly useful tool for homeowners to harness, and negative equity can be harmful. Accessing this equity, however, is not as simple as making a withdrawal from an account. Instead, homeowners apply this equity toward a new loan as collateral at much more favorable mortgage rates than a personal loan or credit card annual percentage rate (APR). One of the most common ways to get equity out of your home is through a home loan refinance, but this approach has its fair share of disadvantages and is far from the only option available to homeowners, and it is important to keep your home loans to a minimum.
Equity Release
Equity release allows all homeowners over a certain age to release tax-free cash from the value of their home. This is beneficial for many reasons:
- Homeowners can use this money to put toward an existing mortgage.
- Those who choose to release equity can use the money to pay off credit card debt, or any other kind of debt they may be in.
What Is Refinancing?
When the terms of a home loan are renegotiated, this process to reach these new terms is called refinancing.3 There are several circ*mstances where a homeowner might attempt to refinance, but this commonly occurs when there is a lower interest rate on a home than at the time the initial credit agreement was reached. Or when the borrower’s financial picture changes. Through a refinance loan, homeowners can lower their monthly payments, reduce their interest rate, or make strides to pay their home off quicker. They can also seek a larger home loan amount, cashing out on their home equity in the process.
This strategy is known as a cash-out refinance4, and the process allows borrowers to apply their home equity toward virtually any purchase they can imagine. A cash-out refinance also allows homeowners to borrow up to 80% of their home’s value, as the terms of this refinance loan mandate that the borrower must maintain at least 20% equity in the home. Though many homeowners will likely end up paying more in interest due to the new home loan’s increased size, a cash-out refinance can also lower the annual percentage rate — making this strategy a very compelling option for some homeowners in the event that they refinance at an opportune time.
What Are the Downsides to Refinancing?
Of course, refinancing is not for every homeowner — and this strategy is not without its disadvantages.
- One of a cash-out refinance’s biggest perks is also its greatest disadvantage, and just because you can use your equity to pay for grand Hawaiian vacations and a pair of jet skis doesn’t mean you should . If done correctly, a cash-out refinance can provide an opportunity for homeowners to expedite their home loan term repayment process and lower their annual percentage rate of interest. The goal is to have a lower interest rate, so that customers will be more likely to make purchases, and have a fair repayment period. When used irresponsibly, it can stretch out your repayment period several decades while saddling you with a higher APR than you began with. Ultimately, refinancing only makes sense to homeowners in the event that they plan to use it wisely, and are responsible when it comes to their loan balance.
- Biting off more debt than you can chew is a dangerous game that can lead to years of bad credit, affect your credit score, and a cash-out refinance can put you at risk of losing your home to foreclosure in the event that you overextend yourself financially. A rule of thumb with a cash-out refinance is to know exactly what you plan to spend the loan amount on and know the exact amount down to the penny. Holding yourself accountable and putting your equity to work can save you a world of headache and financial insecurity down the road, and help make a cash-out refinance a more viable option. However, there are a number of ways to get equity out of your home without refinancing — which we will discuss below!
Can You Get Equity Out of Your Home Without Refinancing
Yes, you can get equity out of your home without refinancing. The three ways to do it are:
- Home equity loan
- HELOC (home equity line of credit)
- Sale-leaseback
Now, it’s important to consider a cash-out refinance vs. a home equity loan. While a cash-out refinance may be the right tool for some homeowners, it’s not the only option out there. Borrowers may also find that a home equity line of credit (HELOC), home equity loan, or a sale-leaseback agreement can provide them with the flexibility they need — but each option will provide its own set of unique benefits.
HELOC
A home equity line of credit (or HELOC) is a tool that lets homeowners access portions of their home equity over a ten-year draw period to be used toward just about anything. This method of accessing home equity provides excellent flexibility and can be an ideal option for those who are between jobs or in need of quick cash — and don’t want to max out a credit card. During the draw period, borrowers are only required to make payments on their interest (which is usually at an adjustable rate,) and are only charged interest for the amounts they withdraw. Once a HELOC enters repayment, however, homeowners become responsible for their full monthly payment.
The difference between these phases can get homeowners into a bit of hot water, as the full payment can put a significant financial burden on borrowers. Additionally, the “revolving door” of credit, which is offered through a HELOC loan, enables some homeowners to take out more equity than they need — similar to a cash-out refinance — leading to an even larger monthly payment.
Requirements: Typically, you’ll need at least 15% equity in your home, over a 600 credit score, verifiable income dating back at least two years, and a debt-to-income ratio of 40% or less.
Opt for This Type of Second Mortgage If… A home equity line of credit is especially useful to those who need greater flexibility than some other second mortgage options, and expect to need incremental access to their home equity for years to come.
Home Equity Loan
What is a home equity loan? Whereas a home equity line of credit allows borrowers to access available equity as needed, a home equity loan enables homeowners to access all of their equity via one lump sum. Home equity loans are often used for large home improvement projects like repairs or renovations and can be a valuable tool for homeowners looking to leverage their equity to increase their home’s value, and keep the property value intact. These loans are not reserved solely for repairs and renovations, and are essentially as versatile as HELOCs — but while a home equity line of credit’s interest rate is variable, a home equity loan is fixed.
Considering a home equity loan is a second mortgage loan, this loan comes with closing costs which can be anywhere from 2-5% of the loan’s total amount.5 Given that the average American home loan is over $450,0006, these single-digit percentage points can amount to $9,000 to $22,000, respectively — eating up a decent chunk of that hard-earned home equity. Home equity loans also often carry a higher interest rate than a primary mortgage, which can accumulate over a 15-year loan repayment period.
Requirements: The requirements for a home equity loan are more rigid than that of a home equity line of credit, and homeowners will need to submit a credit report, have a credit score of 620 or higher, over 20% equity in their home, and two or more years of verifiable income to be considered. If you find yourself wondering how to build equity in a home, make sure to read up on the topic so you can make sure you have all the requirements available to apply for a home equity loan.
Opt for This Type of Second Mortgage If… Borrowers who will need access to the entirety of their available usable equity all at once will benefit the most from a home equity loan, and a home equity loan is a strong alternative to the high-interest rates affiliated with a credit card or HELOC. Because of the taller credit requirements, borrowers with good or exceptional credit history stand to get the most out of a home equity loan.
Sale-Leaseback Agreement
One of the best ways to get equity out of your home without refinancing is through what is known as a sale-leaseback agreement. In a sale-leaseback transaction, homeowners sell their home to another party in exchange for 100% of the equity they have accrued. Then, rather than moving, as would be the case in a traditional sale, homeowners rent the property back from the buyer at market value. While home equity loans, cash-out refinancing, and home equity lines of credit work best when homeowners plan to put their equity back into their homes, a residential leaseback agreement empowers homeowners to use their hard-earned equity to live life on their terms.
Some sale-leaseback agreements can saddle homeowners with the burdens of ownership even after they have sold their home — leaving them to pay property taxes and cover maintenance for a property that is no longer theirs. Truehold, on the other hand, covers 100% of these costs (in addition to insurance and repairs), so our homeowners don’t have to.
Requirements: Given that a sale-leaseback agreement is not a second mortgage like a home equity loan or home equity line of credit, homeowners are not barred from unlocking their equity by credit requirements. As far as equity is concerned, homeowners with more equity stand to benefit the most from a sale-leaseback — but a sale-leaseback agreement through Truehold allows homeowners to unlock 100% of their equity regardless of the amount.
Use This Tool If… Homeowners looking to turn their home equity into true financial freedom can benefit from a sale-leaseback agreement through Truehold, and a sale-leaseback agreement is an ideal option for homeowners looking to reap all of the benefits of homeownership without the responsibility of upkeep, insurance, or property taxes.
Deciding To Take Equity Out Of Your Home
There are a number of ways to get equity out of your home from a lender without refinancing, and each strategy comes with its own unique set of benefits and disadvantages. Whether you choose a home equity line of credit (HELOC), a home equity loan, or a sale-leaseback agreement, you can unlock your home's equity while avoiding refinancing. This also applies to investment properties, too.
It's important to carefully consider your options and the specific benefits they offer before making a decision. Taking advantage of your home equity can be a smart move, especially when it helps pay off high-interest debt, fund valuable home improvements, or support your business aspirations. Before making any decisions, it's essential to educate yourself about the housing market and homeownership trends. Knowing the statistics on homeownership in the United States, you can inform your choice based on what’s best for you.
The method you use to unlock your home equity will come down to your situation and your goals, but the advisors at Truehold are here to answer your questions about how to make your home equity work for you with our sale-leaseback program.
To compare the benefits and fees associated with Truehold and a Home Equity Loan, you can use our home equity loan calculator. It provides a detailed analysis of how much equity you can get out of your home with each option, the fees involved, and more.
Sources:
1. Bankrate. Average monthly mortgage payment. https://www.bankrate.com/mortgages/average-monthly-mortgage-payment/
2. Zillow. Best Home Improvements to Increase Value. https://www.zillow.com/sellers-guide/best-home-improvements-to-increase-value/
3. Investopedia. Refinance. https://www.investopedia.com/terms/r/refinance.asp
4. Bankrate. Cash-out mortgage refinance: How it works and when it’s the right option. https://www.bankrate.com/mortgages/cash-out-refinancing/
5. Bankrate. How much are home equity loan closing costs? https://www.bankrate.com/home-equity/home-equity-loan-closing-costs/
6. CNBC. The average size of a new mortgage just set a record, as home prices continue to climb. https://www.cnbc.com/2022/02/16/the-average-size-of-a-new-mortgage-just-set-a-record.html
I've spent years immersed in the world of real estate, finance, and home equity strategies. Let's dive into the key concepts covered in that article and add some insights:
Equity: It's the difference between your home's current value and the remaining mortgage balance. This value grows as you pay off your mortgage and as the property appreciates.
Home Equity Loan: This is a lump-sum loan where your home is used as collateral. It's ideal for big projects or expenses, offering fixed rates but may incur closing costs.
Home Equity Line of Credit (HELOC): Similar to a credit card, it's a revolving line of credit based on home equity. Flexibility exists in borrowing and repaying during a specified period, but the interest rates may be adjustable.
Sale-Leaseback: Homeowners sell their home to unlock equity but continue living there by paying rent. It's a way to access funds without moving, but it means losing ownership.
Refinancing: This involves changing the terms of your current mortgage, often to get a better interest rate, reduce monthly payments, or cash out on home equity.
Cash-Out Refinance: It's a form of refinancing where you take out a new mortgage larger than your existing one, using the difference in cash. This method allows you to borrow up to 80% of your home's value but comes with the risk of stretching out loan repayment and increasing interest rates.
Benefits and Risks: Each method has its perks and drawbacks. For instance, while a cash-out refinance offers significant funds, it also increases your debt. On the other hand, a sale-leaseback might release all equity but takes away homeownership.
Considerations: Factors like credit score, home equity percentage, income verification, and debt-to-income ratio significantly impact eligibility for these options.
Caution: Taking equity out of your home requires careful planning. Misusing this approach could lead to financial strain, extended repayment periods, and even potential foreclosure.
Deciding Factors: The choice among these methods hinges on your financial goals, current needs, and long-term plans. Understanding the costs, benefits, and implications of each approach is crucial before making a decision.
Expert Guidance: Consulting professionals or using specialized calculators can aid in assessing the best option based on your unique circ*mstances.
Real estate trends, market fluctuations, and personal financial situations affect the viability of these equity-release strategies. Always ensure to stay informed and seek advice aligned with your specific needs.
The knowledge in that article covers the fundamental aspects of unlocking home equity without refinancing, offering a diverse set of options to cater to homeowners' financial needs.
