HELOC vs. Cash-Out Refinance vs. Other Alternatives

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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You’ve spent several years in your home and are interested in converting the built-up equity into cash. Or maybe your home value has rapidly increased due to market conditions, and you want to capitalize by converting the equity into cash.

Traditional banks, credit unions, and online lenders offer home equity lines of credit (HELOCs), cash-out refinances, and home equity loans to help you access the equity in your home. There’s also an alternative route to consider if you don’t qualify for these options but want a debt-free way to get the cash you need.

Unlock Your Home Equity

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Learn how Unlock can help you access cash using your home’s equity without taking extra debt or paying any monthly fees.
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Learn how Unlock can help you tap into your home equity without taking a loan or adding to your existing debt to fund personal projects.

Ways to Tap Your Home’s Value

Here’s a breakdown of four ways to tap into your home’s value. 

Home Equity Line of Credit (HELOC)

A HELOC is a variable rate debt product you can use to borrow against any equity you’ve built up in your home. Most lenders extend HELOCs of up to 85 percent of your loan-to-value (LTV). To illustrate, if your home is worth $600,000 and you owe $475,000, you could qualify for up to $35,000 ($600,000 * .85 – $475,000). 

You’ll also need to meet the lender’s qualification criteria. Most will have minimum thresholds for your credit score and debt-to-income (DTI) ratio, and you’ll likely need a steady, verifiable source of income. 

If approved for a HELOC, you will get access to a pool of funds accessible for a set amount of time. This is called the draw period, and you’re free to withdraw as much as you need, up to the limit. During the draw period, you will also make interest-only payments on the amount you borrow. 

When the draw period ends, your access to the line will end. You will also commence repayment on the outstanding balance. Payments are due each month for the duration of the repayment period and could fluctuate over time.

Cash-Out Refinance Mortgage

A cash-out refinance swaps out your current mortgage with a new one that includes your existing balance and the amount of equity you pull out. Here’s an example of how it works: Your home is worth $350,000, and you owe $250,000. The lender agrees to a cash-out refinance of 90 percent of your LTV, so you borrow up to $65,000 ($350,000 * .90 – $250,000). If the loan is approved, you will receive $65,000 at closing to use how you see fit. 

You will now owe $315,000 (or the original balance plus the amount of equity you borrowed). So, your monthly mortgage payments could be higher, especially if your new rate is steeper than what you had with the prior home loan. 

Home Equity Loan

Like a HELOC, a home equity loan allows you to unlock up to 85 percent of the equity in your home. It also acts as a second mortgage. But the interest rate is fixed, and you won’t have access to a pool of cash to withdraw from. Instead, you will receive the loan proceeds in a lump sum and make equal monthly installments (for principal and interest) over a set period as the interest rate is fixed. 

Home Equity Agreement

A Home Equity Agreement (HEA) is an arrangement between an investor and a homeowner. The investor provides a cash payment today in exchange for a chance to share in home price appreciation when you sell your home in the future. Because this is not a loan, you won’t make monthly payments, and you can utilize the funds to pay off debt, make home improvements or just put some money away for a rainy day.

If a HEA  piques your interest, consider a reputable company like Unlock to get the cash you need. The application process is seamless, and you won’t be subject to the income requirements and monthly payments that accompany other traditional home equity options.

To qualify, you need a minimum FICO score of 500 and at least 25 percent in equity built-up in your home. You could be eligible for up to $500,000 depending on the value of your home and other requirements, and you get 10 years to decide if you want to sell your home or buy back some or all of the equity. Regardless of which option you choose, Unlock will receive their original investment and share of appreciation in the home when the agreement ends. 

Both owner-occupied and non-owner-occupied real estate could potentially qualify for an investment from Unlock. Use the online tool to gauge how much of an investment you could be eligible for from Unlock. 

Unlock Your Home Equity

213 Reviews
Learn how Unlock can help you access cash using your home’s equity without taking extra debt or paying any monthly fees.
213 Reviews
Learn how Unlock can help you tap into your home equity without taking a loan or adding to your existing debt to fund personal projects.

Differences and Similarities

It’s essential to understand the similarities and differences between home equity products. 

Home Equity Loan and HELOC vs. Cash-Out Refinance Mortgage

Home equity loans and HELOCs act as a second mortgage and don’t require you to refinance your home loan. By contrast, a cash-out refinance replaces your existing mortgage with a new one that includes the amount of equity you take out of your home.

Home Equity Agreement vs. Home Equity Loan and HELOC

A Home Equity Agreement (HEA) is a debt-free solution to unlock the equity in your home. You won’t make monthly payments, there are no interest charges and you have up to a decade to determine how to l repay the investment – either by selling your home or buying out the agreement. But home equity loans and HELOCs are second mortgages that have monthly payments and variable interest charges. 

Home Equity Agreement vs. Cash-Out Refinance Mortgage

You won’t incur debt with a shared home equity agreement. But a cash-out refinance mortgage means you’ll add even more to your outstanding mortgage balance as it replaces your old loan with a new one that also includes the amount of equity you borrowed. But with record low interest rates this could be a good option for people that have good to excellent credit.

How to Choose the Right Home Equity Product

Before selecting a home equity product, evaluate how you plan to use the funds to determine the best option. 

HELOC: Best for homeowners who want access to a pool of cash to borrow against as needed. 

A HELOC could be a viable option if you want a flexible loan solution that’s easy to manage. You’re not obligated to take the total amount and will only be responsible for any withdrawals you make. 

Home Equity Loan: Best for homeowners with equity who want a lump sum of cash.

A home equity loan may be a better fit if you have a sound reason for wanting the cash and can comfortably afford to make the monthly loan payments. But if you fall behind on loan payments, the lender could foreclose your home to recoup their losses.

Cash-Out Refinance Mortgage: Best for homeowners who want to consolidate debt or fund expensive home renovations.

While a cash-out refinance likely means a higher monthly mortgage payment, you could free up funds to invest or meet other financial goals if the funds are used to pay off high-interest debt. And if you’re planning to make improvements to your home, your property value could increase substantially. 

Home Equity Agreement: Best for homeowners who want to unlock equity without taking on additional debt and need flexible qualification terms.

Suppose you’re already overwhelmed by your debts or would simply prefer a debt-free option to tap into your home’s equity. In that case, a shared home equity agreement may be best. You can get started with Unlock today and take the first step towards accessing the cash you need by submitting an online inquiry. The application process is seamless, and you could receive funding in as little as 30 days.

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