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A cash-out refinance is only one way you can leverage the equity you have in your home. Home equity loans, home equity lines of credit (HELOCs), and home equity investments can also let you turn that equity into cash—without changing the terms of your original mortgage loan.
Each of these equity strategies has its unique pros and cons, and they’re not right for every homeowner. Use this guide to determine the best way to take equity out of your home without refinancing.
In this guide:
- Can you take equity out of your home without refinancing?
- Ways to tap home equity without refinancing
- Is it a good idea to take equity out of your home?
Can you take equity out of your home without refinancing?
Home equity loans and HELOCs are two of the most common ways homeowners tap into their equity without refinancing. Both allow you to borrow against your home equity, just in slightly different ways.
With a home equity loan, you get a lump-sum payment and then repay the loan monthly over time. A HELOC, on the other hand, is more like a credit card. You can withdraw money as needed and only pay interest on what you take out.
A third, lesser-known option is a home equity investment. These arrangements let you sell off a share of your home’s future value in exchange for a lump sum of cash. There’s no additional debt (or monthly payment) with these; the investor simply takes their share of the home’s value at the end of the term or when you sell the house.
Ways to tap home equity without refinancing
Home equity investments, home equity loans, and HELOCs can all be smart ways to leverage your equity. The right choice for your situation depends on your credit score, budget, how much equity you have, and other factors. Here’s how the three products compare:
|Home equity investment||Home equity loan||HELOC|
|Minimum credit score||500||620||Mid-600s|
|Income requirement||None||Yes, varies||Yes, varies|
|Maximum loan-to-value ratio||75% to 80%||80% to 90%||80% to 90%|
|Maximum debt-to-income ratio||None||43% to 50%, or lower||43% to 50%, or lower|
|Interest rates||None||Yes, usually fixed||Yes, usually variable|
|Term||10 to 30 years||5 to 30 years||10 to 20 years|
Home equity investment
A home equity investment lets you tap your equity without taking on extra debt. The investor will buy a share of your home’s equity, and when the term ends—usually after 10 or 30 years—you’ll buy them out based on the home’s current market value. You might also choose to sell the house or refinance at this time.
There’s no interest charged on home equity investments, but you will pay more if your home appreciates in value by the time your term ends. There are also service fees (usually 3% to 5% of the payment amount), and you will need a good amount of equity to qualify. Most equity sharing agreements allow for only a 75% to 80% loan-to-value ratio, meaning you’ll need to retain at least 20% to 25% equity in your house.
Here’s what that would look like: Say your home is worth $500,000. A home equity investor might allow you to borrow up to 80% of that value—or $400,000, minus your existing mortgage balance.
Home equity investments can be a good option if you need cash but can’t afford another monthly payment. They’re also smart if you have a low credit score or you need a fairly large amount of cash, as home equity investors can offer up to $600,000.
Home equity loan
Home equity loans are more like traditional mortgage loans. You’ll get a lump-sum payment at closing, and then you’ll repay the money back monthly—plus interest—over five to 30 years. These are often called second mortgages and usually come with fixed interest rates, meaning they’ll stay the same for your entire loan term.
Like traditional mortgages, home equity loans come with closing costs, and if you sell your home, your sale proceeds will be used to pay off any remaining balance.
Home equity loans are best for homeowners with decent credit and who can afford to take on a second monthly payment in addition to their existing mortgage payment. They’re also a good option if you don’t have much equity, as some lenders will allow for up to a 90% LTV. meaning For example, if your home is worth $500,000, you could borrow up to $450,000 across your mortgage and home equity loans.
Home equity line of credit
HELOCs are lines of credit based on your home equity. They basically turn your equity into a credit card, and you can withdraw money as needed over an extended period of time. You’ll usually make interest-only payments during the withdrawal period of10 to 15 years, and then start making larger monthly payments after that. HELOCs usually have variable interest rates, meaning your rate can rise over time.
Typically, HELOCs require higher credit scores than other equity products, though they may not have closing costs. You can also borrow between 80% and 90% of your equity. As with all other options, if you sell your home with a HELOC in place, your sale proceeds will go toward paying it off.
HELOCs are a smart option if you’re not sure how much money you need, or you want access to cash over a long period of time. They can also be a good choice if you can’t afford a large monthly payment right now.
Is it a good idea to take equity out of your home?
Leveraging your home equity can often be a smart move, especially if you’re using the funds to pay off higher-interest debt, make valuable home improvements, or start a business. Though refinancing is one way to access your equity, this may not be ideal if you have a low interest rate or want to retain the terms of your existing loan.
Fortunately, other options exist, and it’s important to weigh all your choices before deciding how to tap your home equity. If you’re not sure which is best for your situation, consider speaking to a financial advisor or mortgage professional for guidance. They can help you make the best choice for your finances and goals.
Author: Aly Yale