How to Take Equity Out of Your Home

Home prices have surged in recent years, giving many homeowners unprecedented amounts of equity. If you own a home, you might be wondering what that means—and how to leverage it.

Put simply, home equity is the share of your home’s value you actually own—or its value, minus any mortgage balance you have. Once you have enough equity, you can take out loans against it or use other financial products to turn that equity into cash (at a cost, of course).

Want to put your home equity to good use? This guide will teach you how.

In this guide:

How to get equity out of your home
How long does it take to get equity out of your home?
Is it worth pulling equity out of your home?
How to get started

How to get equity out of your home

There are many ways to take equity out of your home. The most common are home equity loans, home equity lines of credit (HELOCs), cash-out refinances, and home equity sharing agreements.

Here’s an overview of how these options compare:

	Home equity loan	HELOC	Home equity sharing agreement	Cash-out refinance
Minimum credit score	620*	650 to 660*	500	600 to 640*
Income requirement	Yes*	Yes*	None	Yes*
Monthly payments	Yes	Yes	No	Yes
Interest rate	Yes	Yes	No	Yes
Borrowing limit (initial mortgage plus new loan)	Up to 80% of your home’s value	Up to 80% to 85% of your home’s value	Varies by company	Up to 80% to 85% of your home’s value
Closing costs	2% to 5% of the loan amount	Varies by lender	3% to 5% of the investment amount	2% to 5% of the loan amount
Term	5 to 30 years	5 to 30 years	10 or 30 years	5 to 30 years

*Varies by lender

Home equity loan

A home equity loan is a type of second mortgage you take out against your equity. You’ll get a lump-sum payment after closing, and then, as with your initial mortgage, pay it off monthly over an extended period of time. That means two monthly payments—your home equity payment and your existing mortgage payment.

With a home equity loan, there are no restrictions on how you use your funds, but you will pay closing costs (typically around 2% to 5% of the loan amount). Most lenders will let you borrow up to a combined 80% of your home’s value between your existing mortgage and your new home equity loan.

Here’s an example of a home equity loan: Say your home is worth $400,000, and you have $200,000 left on your existing mortgage loan. With a home equity loan you may be able to take out up to $120,000:

$400,000 (home value) x 0.80 (combined borrowing limit) – $200,000 (current mortgage) = $120,000

Pros

No restrictions on how you spend borrowed funds
Fixed interest rates and monthly payments
Interest may be deductible (up to $10,000, per the Tax Cuts and Jobs Acts, and as long as you itemize your returns and use the funds to improve your home)

Cons

Requires a second monthly payment
Requires closing costs
Uses your home as collateral

To compare options, check out the best home equity loans.

>>Read more: How does a home-sale leaseback work?

Home equity line of credit (HELOC)

HELOCs are another product that lets you pull equity from your home, except you don’t get a lump-sum payment. With HELOCs, you have access to a credit line, which you can withdraw from as needed (much like a credit card). These typically come with variable interest rates, which means your rate can increase or decrease over time. Closing costs are often minimal or even nonexistent on HELOCs.

As with home equity loans, HELOCs mean a second monthly payment, though you may only make interest payments during the initial draw period. Once you enter the repayment period (typically after 10 years), you will begin making larger payments to your lender. In some cases, you may need to repay it in full at that time; this is also called a balloon payment.

Here’s an example of a HELOC: If your home was worth $300,000, and you had $150,000 on your initial mortgage loan, you could get a HELOC of at least $90,000 over a period of time:

$300,000 (home value) x 0.80 (combined borrowing limit) – $150,000 (initial mortgage) = $90,000

You could withdraw $10,000 from that balance and repair your home’s roof, then three years later withdraw another $5,000 to pay off a high medical bill. A HELOC is a revolving line of credit, not a lump-sum payment. And unlike with other equity products, you only borrow—and pay interest on—the funds you actually use.

Pros

No restrictions on how you spend borrowed funds
Allows you to withdraw funds when needed
Interest may be deductible
May only require interest payments for the first few years
You only pay interest on what you use

Cons

Requires a second monthly payment
Requires closing costs
Interest rate can increase over time
May require a balloon payment
Uses your home as collateral

To compare options, check out the best home equity lines of credit.

Cash-out refinance

With a cash-out refinance, you actually replace your existing mortgage loan with a new, larger one. You then use that loan to pay off your existing balance, and you get the remaining funds back in cash. In some cases, your loan may have a different term (longer or shorter payoff time) and a different, often lower, interest rate.

You can typically get a new mortgage worth 80% to 85% of your home’s value with a cash-out refinance, and there are both fixed- and variable-rate options. You’ll also pay closing costs of about 2% to 5%, just as you would on a traditional mortgage. As with the other home equity options, you can use the funds on anything you like.

Here’s an example of a cash-out refinance: Say you have a current balance of $200,000. You could refinance into a $250,000 loan, pay off your current mortgage, and get $50,000 cash in return. You could then use that money for anything you like.

Pros

No restrictions on how you spend borrowed funds
Does not require a second payment
The interest may be deductible
May offer lower interest rates than other options

Cons

Requires closing costs
Your interest rate and terms may change
If your home loses value, you could end up owing more than it’s worth

To compare options, check out the best cash-out refinance companies.

Home equity sharing agreement

Home equity sharing agreements, also referred to as home equity investments, are another option. Unlike the previous products, the homeowner does not take on additional debt or have monthly payments.

With a home equity sharing agreement, an investor purchases a share of your equity and gives you a lump-sum payment, essentially buying a portion of your home’s future value. You either buy their share out when you sell, refinance, or when the term ends. In some cases. you may also have to pay back the initial investment.

Equity sharing companies only operate in select markets, and the amount you can get depends on your location, equity stake, home value, and more. Some investors offer up to $600,000 in funding for homeowners with a large share of equity on a high-value home. You may pay anywhere from a 3% to 5% service fee for these arrangements, as well as any third-party fees (appraisal, etc.)

Here’s an example of a home equity sharing agreement: Let’s say you need $150,000 to cover a major home renovation. You might sell 20% of your future equity to a company like Hometap or Point in exchange for $150,000 in cash. After five years, you sell the home for $900,000. You’d then owe the equity sharing company $180,000—or 20% of the home’s sale proceeds.

Pros

No restrictions on how you spend borrowed funds
No monthly payment
No interest costs
No extra debt

Cons

May have shorter terms than other options
Could result in a significant loss of equity if your home appreciates a lot
Not available everywhere

To compare options, check out the best home equity sharing companies.

How long does it take to get equity out of your home?

Home equity sharing agreements are likely your fastest path for cash, since there’s no underwriting process and your credit and income matter less (these are more about the property value than anything).

HELOCs, home equity loans, and cash-out refinances typically take longer, as the lender will look more carefully at your finances and assets. Most refinances close between 30 and 45 days.

Is it worth pulling equity out of your home?

Tapping your home equity often results in paying more in the long run, and extending the time it takes to pay off your debts.

Here are a few scenarios when taking equity out may be worth it, though:

You’re using the funds to improve your house. If you plan to use your cash to make home repairs or renovate your property, it could be a wise investment. Just make sure you choose projects that increase your home’s value (which increases your equity stake, too!)
You’re paying off higher-interest debts. Mortgage products typically come with lower interest rates than credit cards and personal loans. This makes them—including cash-out refinances and home equity loans—a great option for consolidating debt. Once you have the funds, use them to pay off your higher-interest balances.
You know you’ll live in the home for a while. Tapping your home equity won’t come free, so you’ll want to stay in the home long enough to recoup your costs and reap the full benefit. If you’re not sure you’ll be in the house much longer, it may not be the best move.

You can always talk to a financial advisor, accountant, or mortgage professional to see if tapping your home equity is a wise move in your case. They may also be able to suggest alternative financing options.

How to get started

First, calculate how much equity you’re working with (just take your home’s current value and subtract your mortgage balance). Then use the chart above to evaluate your options. From there, pick the best equity product for your needs and goals, and shop around. You’ll want to compare at least a handful of lenders/companies to ensure you’re getting the best rate.