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Home Equity

How to Sell Equity in Your Home

Home equity is the amount of ownership you have, free and clear, above what you owe on your mortgage. It presents a compelling way to borrow money. 

“Selling” home equity could grant you access to money you need, whether it’s for daily living expenses or an expensive home renovation. And you don’t necessarily need to sell your home to get access to your equity.

How to turn your home equity into cash

At its core, selling home equity is exchanging your equity in your home for cash. You can do this with a loan, commonly called “tapping” into your equity. It’s also possible to enter into a contract with a company to exchange a percentage of your equity appreciation—the amount your home’s value is expected to increase—for some cash.

Here are some companies that let you do this.

Company
Best for…
Rating (0-5)
Best HELOC
4.9
Best for Equity Sharing Agreements
4.8
Best for Comparison Shopping
4.5

To dive deeper into each of your options, check out this table summary below.

Type of equity accessBest for
Home equity line of credit (HELOC)Flexible funding needs
Home equity loanA lump sum upfront for a large expense
Reverse mortgageNo monthly payment
Cash-out refinanceOne lump sum and one monthly payment 
Home equity agreementBorrowers with a home in a desirable area who may have trouble qualifying for a loan or don’t want a monthly payment
Home sale-leasebackHomeowners who want to access all of the equity and stay in the home

Home equity line of credit (HELOC)

A HELOC allows you to borrow funds as needed up to an approved limit.

How it uses your home equity

You’re approved for a HELOC based on your home’s value and your creditworthiness. 

Your home equity acts as collateral on a HELOC; which allows you to qualify for a lower APR, but it does put your home at risk. You then draw funds as needed from your credit line during a set period called a draw period. 

A draw period typically lasts 10 years. During this time, you typically make interest-only payments on the amount drawn. At the end of the 10 years, you enter the repayment period, typically lasting 20 years, in which you make interest and principal payments and can no longer draw funds from the credit line.  

HELOCs may have minimal closing costs and fees associated with originating the loan, but you do pay a variable APR. You only repay the amount you draw from the credit line, plus interest.

For example: 

Home value$500,000
HELOC line of credit$100,000
Amount drawn$5,000
APR (variable)10.36%
Monthly payment$100 on the $5,000 drawn, but could fluctuate as variable APR changes

Pros and cons

Pros

  • Flexible use of cash

  • Low-cost loan

  • Use it as you need it

Cons

  • Need to qualify for the loan

  • Variable APR

  • Your home is at risk of foreclosure if you default

Home equity loan

A home equity loan is a lump sum loan where installment payments begin immediately.

How it uses your home equity

A home equity loan uses your home as collateral to lower your APR. You still own your home, but the home equity loan becomes a second mortgage you must pay monthly.

Like a HELOC, the loan amount is based on your home’s value, the lender’s loan-to-value ratio threshold, and creditworthiness. 

For example:

Home value$500,000
Loan amount$100,000
APR (fixed)9.49% 
Monthly payment$1,293

Pros and cons

Pros

  • Fixed APR

  • Consistent monthly payments

  • All money disbursed upfront

  • Long repayment terms for affordable monthly payments

Cons

  • Home is at risk of foreclosure in case of default

  • Need good credit to qualify

  • May need to pay closing costs or fees

  • Will have two mortgage payments

Reverse mortgage

A reverse mortgage is for borrowers over 62 who need to tap the equity in their home to receive money. It can be disbursed as a lump sum, in monthly payments, in a credit line, or a combination of the three options.  

The amount you can borrow is called the principal limit, and it’s determined by factors such as the borrower’s age, the home’s value, and the interest rate.

How it uses your home equity

A reverse mortgage isn’t repaid until the loan’s end, when the last borrowing partner dies, leaves, or sells the home. The proceeds you receive from the reverse mortgage are added to the monthly balance, which you’re charged interest on. Your home equity becomes lower over time. 

Example:

Home value$500,000
Borrower age72
Existing mortgage balance$0
APR8.24%
Principal limit$190,500

Pros and cons

Pros

  • No monthly payment

  • May be easier to qualify for

  • Can help with monthly cash flow or help you stay in your home

Cons

  • Loses equity over time as the loan balance grows

  • Must be repaid all at once at the end

  • Borrowers over 62 who need to improve monthly cash flow or need a large lump sum to 

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a new mortgage and refunds you the difference in cash. 

How it uses your home equity

With a cash-out refinance, it’s typical to be able to refinance at 80% of your home’s current market value. The difference between this number and what you still owe on your mortgage can be refunded in cash, essentially cashing out much of the equity you’ve built in the home.

Repayment begins immediately with the new mortgage, but you only have one payment. It does reset your term, so you’ll start paying for a new 30- or 15-year mortgage. You will need to pay closing costs on this type of loan.

Market value$500,000
Existing mortgage balance$200,000
Equity (market value – existing mortgage)$300,000
Maximum new loan (80% of $500,000)$400,000
Cash back ($400,000 new loan – $200,000 existing mortgage)$200,000

Pros and cons

Pros

  • One payment

  • Lower APR

  • Possible to get a large amount of cash out of your property

Cons

  • Longer repayment term

  • Need to pay closing costs in most cases

  • Possible higher payment (depending on how much you take out)

Home equity sharing agreement

A home equity sharing agreement is where you sell a portion of your equity to a company in exchange for a percentage of future appreciation. 

How it uses your home equity

Depending on how much your home appreciates, the amount of equity you sell could be substantial. Equity-sharing companies often take four times the percentage invested in your home. That’s huge. 

Repayment happens when you sell the home with a maximum term of 30 years. At this time, the company will take back the original loan amount plus around 4 times the percentage you borrowed (e.g., if you borrowed 10%, the company would want 40%).

Example:

Home value$500,000
Loan amount$50,000 loan (10% of home’s value)
Future appreciation10% * 4 = 40% 
Home value after appreciation$700,000
Total appreciation$700,000 – $500,000 = $200,000
Amount owed to the home equity sharing company for appreciation plus original loan amount$200,000 *40% = $80,000
Total amount paid$80,000 + $50,000 = $130,000 paid

Pros and cons

Pros

  • Access equity without debt

  • No monthly payments

  • Pay for repairs or other expenses that are high

Cons

  • Equity appreciation belongs to the home equity sharing company you sold it to

  • Could be very costly if your home has strong appreciation

Home sale-leaseback

A home sale-leaseback, also called a seller rent back, is where you sell your home and rent it back from the new owner. 

How it uses your home equity

You gain 100% of your equity from selling your home. Home sellers often pay quite a bit to sell their homes in commissions to realtors, concessions to the seller, and other closing costs. 

There’s no loan to repay, but you’re no longer the owner of the home. 

Example:

Home sale price$500,000
Existing mortgage balance$200,000
Net$300,000

Pros and cons

Pros

  • Gain access to all your earned equity

  • No mortgage payment (helpful if you’re moving to a new place in the future).

  • Can improve cash flow

Cons

  • You no longer own your home

  • You pay rent now instead of a mortgage

  • No benefits of home appreciation

How much of my home equity can I cash out?

The amount of equity you can cash out depends on the market value of your home and your current mortgage balance as a percentage of it. Also known as the loan-to-value ratio (LTV), it is calculated by dividing the present loan amount by the present market value. 

Your lender uses this number to limit the amount of equity you can take out of your loan. The different loan types have varying loan-to-value ratios. 

  • Home equity loan/HELOC: Up to a maximum of around 80%
  • Reverse mortgage: There’s no LTV ratio for reverse mortgages, but the amount you can get out of your home is limited. This limit is called the principal limit amount, which ranges widely between 20% for younger borrowers with a higher interest rate and 75% for older borrowers with a lower interest rate. 
  • Cash-out refinance: Around 80%
  • Home equity sharing agreement: 70% – 85% 
  • Home sale leaseback: As much equity as you have.  

Ask the expert

Chloe Moore

CFP®

The decision to tap into your home equity should not be taken lightly. There are many risks, such as losing your home if you miss payments or owing more on your home than it’s worth if the value of your home decreases. Before deciding on the right method, consider why you need to access equity, how the funds will be used, and your repayment plan.

FAQ

How does a home equity loan differ from a HELOC?

A home equity loan and a home equity line of credit (HELOC) might seem similar, both relying on the equity in your home. But they function differently. A home equity loan provides a lump sum, which you pay back over time. 

Think of it as a second mortgage with a fixed interest rate. A HELOC operates more like a credit card. It allows you to borrow up to a certain limit during a set period while only paying interest on the amount you use.

Can I access my home equity if I have a mortgage?

Having a mortgage doesn’t prohibit you from accessing your home equity. Most home equity loans and HELOCs are taken out by homeowners who still have an ongoing mortgage. You’ll need sufficient equity in your home, which is the difference between the estimated value of your home and what you still owe on your mortgage. 

What are the risks of using home equity?

Tapping into home equity can provide extra funds when needed, but you’re essentially borrowing against your home. If you fall behind on repayment, it puts your home at risk of foreclosure. 

Also, the amount you owe on your home could end up exceeding its value, especially if property prices drop. It’s crucial to consider your repayment capacity before using home equity.

Are there tax benefits to using home equity?

There can be tax benefits to using home equity, but they’re not guaranteed. The Tax Cuts and Jobs Act of 2017 allows you to deduct interest paid on a home equity loan or HELOC used to “buy, build, or substantially improve” your primary or second home. 

However, these deductions don’t apply to loans used for other purposes. It’s always best to consult with a tax professional to understand all the implications.