With every mortgage payment, you build up your home equity. And when home values rise, your equity stake rises, too.
Just look at last year. Thanks to the red-hot housing market, the average homeowner increased their equity by 31% in 2021—about $57,000 per property.
This added equity doesn’t just mean more profits when selling the house but gives you access to cash should you need it. Want to turn your home equity into cash? Use this guide.
How does the equity in my home turn into cash?
There are several ways to unlock your home equity and turn it into cash. The most common option is some form of home equity financing—a cash-out refinance, home equity loan, or home equity line of credit (HELOC). With these products, you don’t sell your home equity but use it as collateral, getting cash in return.
If you’re ineligible for one of these (perhaps your credit score is too low) or prefer to avoid an added monthly payment, there are also home equity sharing agreements. These allow you to give an investor a portion of your equity, and they pay you a lump sum in exchange.
In both cases, you won’t technically sell equity in your home. You’ll only do this when selling the property.
Home equity loans
A home equity loan is a loan you take out against your home’s equity. It acts as a second mortgage of sorts. You’ll pay interest, make monthly payments, and repay the balance over time—usually between 10 and 30 years.
Most lenders allow you to take out around 80% of your home’s value less what you owe on your primary mortgage.
Interest rates on these loans are typically fixed and slightly higher than traditional mortgage rates (though lower than personal loans, credit cards, and HELOCs). They also come with closing costs, which vary by lender and locale.
When a home equity loan is a good choice
A home equity loan can be a great way to cover larger, fixed expenses or consolidate higher-interest debts like those on credit cards or personal loans. In both situations, a home equity loan will typically save money in the long run.
Here’s an example: Say you needed to replace your home’s roof. If you didn’t have enough savings to cover the project’s costs upfront, you might look into a home equity loan, which would have a lower interest rate than other financing options. It would also give you a lump sum.
In this scenario, you would be able to deduct the interest paid on your home equity loan on your annual tax returns. According to the IRS, interest paid on home equity loans and HELOCs is deductible as long as you use the funds to improve your home.
>> Compare: Best home equity loans
Home equity line of credit
A home equity line of credit is another way of using your equity as collateral; in this scenario, it works more like a credit card. Instead of receiving a lump-sum payment, you draw from your HELOC as needed over a certain amount of time (called the draw period). After that, you enter the repayment period and start repaying your balance. Most draw periods are between five and 15 years.
Typically, HELOCs have variable interest rates, which can change from month to month. However, in some cases, a lender may offer a fixed-rate option. Generally speaking, HELOC rates are higher than rates on home equity loans and refinances.
Homeowners can usually get anywhere from 80% to 85% of their home’s value, minus their remaining mortgage balance. As with home equity loans, there are often closing costs associated with HELOCs, though not always.
When a home equity line of credit is a good choice
HELOCs are a good option for home improvements or other drawn-out expenses you can’t accurately estimate the costs of just yet.
If you were planning to renovate your kitchen, for example, you might use a HELOC. These typically cost around $26,000, so you might want to secure a line of credit for around $30,000. That way, you can draw from the line of credit as costs crop up, but you aren’t forced to use the full amount or pay interest on it.
HELOCs come with lower rates than credit cards, so one could save you money in the long run. Like with home equity loans, there’s an added tax perk, too: You can deduct the interest you pay on HELOCS as long as you use the funds to improve your home.
>> Compare: Best HELOCs
A cash-out refinance is another way to tap your home equity. You essentially take out a mortgage larger than your current balance, use those funds to pay off your first loan, and then get the remaining balance in a lump-sum cash payment.
Cash-out refinances will usually have the lowest interest rates since they are first-lien mortgages. There are also closing costs (around $2,400, on average), and you can typically choose terms up to 30 years. As with other equity options, you can typically get around 80% of your home’s value with a cash-out refinance.
When a cash-out refinance is a good choice
A cash-out refinance is a great way to consolidate higher-interest debts since mortgage rates are comparatively low. The current average rate on mortgages is 3.45%, while the average credit card rate is over 16%, as of February 2022.
For instance, you might have two credit card balances of $8,000 and $5,000 with interest at 16% and 18%, respectively, and a car loan of $10,000 at 7% interest. Your current remaining mortgage balance is $150,000. In this scenario, you could do a cash-out refinance for $173,000 ($150,000 + $8,000 + $7,000 + $10,000).
You’d then use the lump-sum payment to pay off your cards and car loan, rolling them into your mortgage balance. You’ll then continue making mortgage payments and pay off those debts at a much lower interest rate than you were previously paying.
A nice bonus with this strategy is that paying off all those debts can help improve your credit score. It also streamlines repayment because instead of making several payments each month—all with different deadlines—you only have one payment to worry about.
>> Compare: Best cash-out refinance companies
Home equity sharing agreement
You can also consider a home equity sharing agreement. With this solution, you give an investor a portion of your home equity in exchange for cash.
The costs of these vary, but you’ll usually pay a service fee plus third-party fees. There is no interest rate, though. Instead, the amount you owe is based on your home’s appraised value when you buy out the company’s position in your home. This can either be based on one single percentage of the final appraised value or a percentage of any appreciation during the term plus the originally invested amount.
These agreements provide homeowners with anywhere from $15,000 to $600,000 in cash depending on the company you work with and your home’s value and location.
Unlike other equity products, you don’t repay your home equity sharing funds monthly. Instead, you give the investor their portion of the equity when you buy out their position before the end of the term (typically 10 or 30 years) through a cash payment, refinance, or home sale.
When a home equity sharing agreement is a good choice
Home equity sharing agreements are best if you can’t afford a monthly payment or have poor credit and can’t qualify for other home equity products.
For example, if your job has unpredictable income and you aren’t sure you can manage monthly payments, you might look to an equity sharing agreement. This would give you access to cash without requiring any sort of repayment for several years.
>> Compare: Best home equity sharing agreements
Why home equity financing can be a good choice
Home equity financing is generally ideal if you’re a homeowner in need of cash—especially if you’d need to use a credit card or personal loan otherwise. Credit cards and personal loans typically come with much higher rates and would cost you more in the long run.
That being said, there are some drawbacks to taking equity out of your home. The main drawback is that your home will be used as collateral. If you default on your loan, your home could be foreclosed so the lender can recoup some of the lost funds.
Make sure you can afford your monthly payments before taking out a home equity loan. If you can’t guarantee that you’ll be able to repay the loan, you should avoid borrowing money or look into unsecured loans.
How much equity can I cash out?
The amount of equity you can access depends on the lender you use. Most allow a loan-to-value (LTV) of between 80% and 85%.
Here’s what that means: Say your home is worth $350,000. That would mean you could borrow up to $297,500 ($350,000 x 85%), minus whatever remains on your main mortgage balance.
You can also calculate how much equity you have in your home by subtracting your mortgage balance from the home’s value. Though you won’t be able to borrow this full amount, it can give you an idea of how much you’re working with.
Recap of ways to access the equity in your home
Home equity is a powerful thing, and there are many ways to turn it into cash. From refinances and home equity loans to HELOCs and shared equity agreements, the options are many.
To determine which is best in your case, you’ll want to consider your credit score, your budget for a monthly payment, how much cash you need, and when you’d be able to repay the debt. What you’ll use the funds for should play a role, too. As a reminder, here are some of the best use cases for each of the equity products we mentioned above:
|Equity Product||When it may make sense|
|Home equity loans||You have large, fixed expenses|
You need to consolidate higher-interest debts
You want to make home improvements
|HELOCs||You have ongoing expenses that you can’t estimate upfront|
You want to make home improvements
|Cash-out refinance||You need to consolidate higher-interest debts|
You want the lowest rate
|Home equity sharing agreement||You aren’t eligible for traditional equity financing solutions|
You can’t afford an additional monthly payment
If you’re still unsure which is best, it might be helpful to talk to a loan officer, financial advisor, or mortgage broker. They can take your goals and financial picture into consideration and point you toward the best solution.
Meanwhile, if you’re ready to sell equity in your house outright, listing your property is the way to do it. You’ll get that equity out of your sale proceeds in cash.