If you require a large sum of money for a major home renovation, debt consolidation, or an anticipated medical bill, you may be tempted to refinance your home. While refinancing may be the quickest way to unlock the cash you need, going this route comes with several disadvantages. For one, you’re on the hook for closing costs, which include appraisal fees, credit report fees, origination fees, attorney fees, and more.
However, you can tap into the equity you’ve built on your home without having to refinance or sell your property. Here’s how to get equity out of your home without refinancing, how much equity you can access, and how soon you can take it out.
Access Your Home Equity
How to Calculate How Much Equity You Can Access
If you plan to get equity out of your home, it’s essential to understand the amount of equity you currently have. To figure out how much you have in your home, find the difference between your home’s appraised value and the amount you still owe on your mortgage.
Let’s say your home’s market value is $350,000 and, your remaining mortgage is $150,000, your home equity is $200,000. The higher the amount of equity in your home, the more financing options you’ll have.
It’s important to note that lenders are more interested in the amount of equity you already own than your creditworthiness. This is because your home acts as collateral, meaning the lender can foreclose on your home to recoup the losses if you default.
How Soon You Can Take Equity Out of Your Home
Whether you recently purchased a house or have been owning one for a while, you can tap into the equity in your home anytime. There’s no specific timeframe for taking equity out of your home, provided that you’ve built up enough equity.
For example, if you recently bought a home at $500,000 and paid a 20% down payment, which is $100,000, your home equity stands at $100,000. And if you’ve made mortgage payments, your equity will be higher.
Keep in mind that most lenders require at least 20% equity in your home and typically cap borrowing at 80% of a home’s value. So, the question isn’t how soon you can take equity out of your home but how much equity you’ve built.
Ways to Get Equity Out of Your Home Without Refinancing
You can take equity out of your home in various ways. The most popular forms include home equity sharing agreements, home equity lines of credit, and home equity loans. Each option has pros and cons you should weigh when deciding the right one for you.
Access Your Home Equity
Equity Sharing Agreement
An equity sharing agreement allows you to convert the equity in your home into cash without accumulating extra debt. The investor will buy a share of your home’s equity based on the current market value at the end of the chosen term, typically 10 to 30 years. You may also have the option to sell your home or refinance when your term expires.
One of the significant advantages of an equity sharing agreement is the no monthly and interest payments. However, you may need to pay a service fee and need a good amount of equity to qualify for one. Most equity-sharing agreements offer a 75% to 85% loan-to-value ratio.
Such agreements can be an excellent option if you have an immediate need for cash but can’t afford monthly payments. They are also a great resource if you need a fairly large amount of money and have a low credit score.
Does an equity sharing agreement sound like a good option for you? If so, Unison can help you unlock up to 17.5% equity in your home without having to make monthly payments or pay interest. Instead, you will pay Unison the initial investment plus any change in value at the end of the term, typically 30 years, when you sell your home or when you pass away. Visit Unison’s website to learn more about the program and see how much equity you can unlock.
A home equity line of credit (HELOC) is a type of second mortgage that allows you to borrow money using the equity that you’ve built in your home and receive the funds as a line of credit. Simply put, it is a revolving line of credit that gives you access to cash on a needed basis. Much like credit cards, you can draw as little or as much as you need up to a certain credit limit, repay, and borrow again. The good news with HELOCs is the flexibility it offers 一 you only pay interest on what you borrow.
Traditionally, HELOCs work on a 30-year model, a 10-year draw period, and a 20-year repayment period. If you choose an interest-only, you’ll be required to make interest payments only, and not the principal, during the draw period. Once the draw period expires and enters a repayment period, you’ll begin to pay the principal and interest.
Home Equity Loans
Also generally known as a second mortgage, a home equity loan is a financing option that allows homeowners to borrow against their homes. Essentially, your home serves as collateral, meaning the lender can foreclose on your property to recoup the losses if you default.
Home equity loans often come as a lump sum of cash with a fixed interest rate. Like conventional mortgages, these loans have a set repayment period, where the borrower makes fixed, regular monthly payments. The amount you can borrow is based on the difference between the home’s current market value and the remaining mortgage balance. The amount of home equity loan you’ll get and the interest you’ll be charged depends on your credit score, repayment history, debt-to-income ratio, and other factors lenders look at.
Tapping into a home equity loan can be a great way to convert the equity you’ve built up into cash, especially if you want to put that cash into renovation projects that could increase the value of your home.