Your home equity could be a powerful tool for helping you meet your financial goals. If you need to pay for an extensive renovation, fund adoption expenses, or supplement your retirement income, there are many ways you could extract equity from your home in order to better your life.
But how exactly do you get the equity out of your home? What are the best methods that are affordable and make sense for your situation? Whether you’re thinking of a cash-out refinance, a home equity loan, or another option, you’ll want to carefully evaluate the costs, risks, and impact on your financial situation.
We have you covered. We’ll go over how to get equity out of your home, the different methods for accessing the equity in your home, and the pros and cons of each.
What Is Home Equity?
Home equity is the amount of total ownership you have in your home over what you owe on your mortgage. It is the amount you would receive if you were to sell the home today.
Equity is best expressed mathematically. To calculate your home equity, subtract your outstanding mortgage amount from your home’s current market value:
Home’s value – your mortgage = equity
For example, if your home is worth $500,000 and your mortgage is $300,000, you would have $200,000 in equity ($500,000 – $300,000 = $200,000).
5 Ways to Take Equity From Your Home
If you’re ready to take the next step and seriously consider taking some equity out of your home, you have five main options, including: a home equity loan, home equity line of credit (HELOC), cash-out refinance, home sale, and equity-sharing arrangement.
Home Equity Loan
If you’re looking at pulling equity out without refinancing, a home equity loan or a HELOC is the move you’re going to want to make. A home equity loan offers a low interest rate because it uses your home’s equity to secure the loan. Because of the way it works, you may have access to a larger sum of money at a lower interest rate than you would if you used another source, such as a credit card.
Home equity loans disburse funds upfront. The loan would have a fixed interest rate and a set repayment plan. You’ll start repaying the loan from your first payment (vs just paying interest for some period of time).
The main negative with a home equity loan is that it uses your home as collateral. If you fail to make payments, the lender could start foreclosure proceedings against you. Another drawback is that if you don’t need all the money you’re borrowing at one time, you are getting it all nonetheless, as a lump sum, and you’ll be paying interest on that full amount.
HELOC
A HELOC is another type of home equity loan secured by your home’s equity, with the main difference being that the amount you borrow is more flexible. With a HELOC, you apply for a loan with a maximum amount. If approved, that maximum amount becomes like a credit limit. You borrow what you need when you need it, and when you repay what you have borrowed, the full credit limit becomes available to you once again.
One advantage of a HELOC is that you only need to make payments on what you’ve borrowed. This minimum payment is determined by your lender when you apply for the loan, but is usually a lower amount during the initial draw period.
Cash-Out Refinance
Another option for accessing your home’s equity is through a cash-out refinance. This is where you replace your existing mortgage with a new, bigger mortgage and take the difference in cash.
It works if interest rates are great and you have a significant amount of equity in your home. (Most lenders will only allow you to borrow up to 80% of your home’s equity, especially if you want a good rate.) As a quick example: If your home is worth $300,000, the lender may be able to loan out $240,000. If your existing mortgage is $200,000 and you get the full $240,000, then approximately $40,000 (less any closing costs) could be refunded to you.
Sale
When you sell your home, all of the equity that you have accumulated — less the costs associated with the sale — can be converted to cash. There is also the possibility for you to enter into a sale-leaseback arrangement. This is where you sell your home and then lease it back from the new owner. Just as with a sale, you gain access to almost all of the equity you’ve accumulated over the years. You also get to stay in your home, provided you find the lease agreement acceptable.
Equity Sharing Arrangement
With an equity sharing arrangement, the homeowner enters into an agreement with a company that provides some money to the homeowner in exchange for a percentage of the home’s appreciation. The company is essentially an investor that bets on the value of your home rising.
There typically isn’t a monthly payment. The investor gets their money back when you buy them out or sell the home.
The main thing to look out for with this option is how much the investor asks in return for the loan. The long-term costs for this option could potentially be significant — usually 10% equity or more.
Pros and Cons of Using Home Equity
After looking at all of your options for accessing the equity in your home, the pros and cons of the methods look like this:
|
Home Equity Loan |
|
|---|---|
| Pros | Cons |
| Access to large amounts of cash | Home is used as security on the loan |
| Low interest rates | Home equity lending takes time |
| Large, upfront sum | Longer loan terms could mean you’ll pay more |
| Fixed interest rate and repayment schedule | Not very flexible |
|
HELOC |
|
| Pros | Cons |
| Access to large amounts of cash | Home is used as security on the loan |
| Low interest rates | Home equity lending takes time |
| Flexible loan amounts | Longer loan term could mean you’ll pay more |
| Flexible repayment | Adjustable interest rate |
|
Cash-Out Refinance |
|
| Pros | Cons |
| One loan payment for home mortgage plus cash you are borrowing | Must pay closing costs for a new mortgage |
| Access a large amount of cash | May have a higher monthly payment |
| Could potentially get better loan terms | Potentially higher rates |
|
Home Sale |
|
| Pros | Cons |
| Access 100% of your home’s equity | No longer own the home |
| No need to qualify for a new mortgage or home equity loan | Must pay selling costs |
| No home maintenance costs | May need to find additional housing |
|
Equity Sharing |
|
| Pros | Cons |
| No monthly payment | You won’t realize all the equity gains of your home |
| Don’t need to pay back until you sell the home or buy the equity back | Equity sharing percentage could be quite large |
| May not need good credit to qualify | Need sufficient equity to qualify |
| Shared risk | Complex agreements |
How to Get Equity Out of Your Home
If you’ve made up your mind to extract some equity from your home, the process looks something like this:
Determine how much equity you have in your home
To figure out how much equity is in your home, start with a good estimate of your home’s market value. A real estate agent or assessor can provide this for you. Online estimates can get close, but they won’t be as accurate. The more accurate (and unbiased) an estimate you can get, the better you’ll be able to gauge how much equity you have. Use the formula from above (home value – your mortgage = estimated equity).
Decide how to take equity out of your home
Examine the list above to determine which means of accessing the equity in your home feels right for you, whether it be a home equity loan, HELOC, home sale, or other method.
Shop around for a lender
If you elect to extract equity with a cash-out refi, HELOC, or home equity loan, you’ll need to look for a lender that offers competitive rates and terms for what you want. Comparison shopping is a good idea; keep in mind shopping around won’t count against your credit if you do it within a 45-day window.
Qualify for a loan
Once you’ve narrowed down your choice of lenders, submit a full application. Your lender will start reviewing your documents to verify income, employment, identity, and loan details. The lender will also check your credit score and debt level to ensure you qualify for the loan.
Get an appraisal
Your lender will order the appraisal for your loan, which is necessary to determine the exact value of the property and how much equity you have in the home. It’s pretty common to be able to get a desktop appraisal or use an automated valuation model (AVM) to determine the value for a home equity loan or HELOC. (An appraisal will also likely be needed if you sell your home or enter into an equity-sharing arrangement.)
Close on the loan
After an underwriter has reviewed your file, the lender will send loan documents for you to review and sign. If there are any closing costs, you may be directed to bring funds to closing.
Receive funds
Money from the loan will be deposited into an account of your choosing.
Which Method of Getting Equity Out of Your Home Is Best for You?
The best method for taking equity out of your home depends on your goals. Do you need the largest amount of money while maintaining ownership of the home? Perhaps a cash-out refinance is for you. Do you like the idea of having a flexible line of credit that you can use when you need it? A HELOC might suit your needs. Do you want to access 100% of your equity and not be responsible for the costs of homeownership anymore? Then perhaps selling your home is the answer.
If it fits with your life plans, then it will make the best sense financially, even if there’s another method that may offer a lower interest rate.
The Takeaway
When you’re planning to get equity out of your home, the most important thing to take into consideration is how you’re going to use it. Since taking equity out of your home usually means you’ll be paying on the loan longer, you’ll want to carefully consider which method helps you meet your financial goals.
SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.
FAQ
Is it a good idea to take equity out of your house?
Taking equity out of your home typically means you’ll take longer to repay the loan (though not always — it depends on the terms and rates of your loan). Even if you get a lower interest rate and lower monthly payment, a longer loan term could mean that you’ll pay more for your mortgage because of the added years you’ll have on the mortgage.
How do you pull equity out of your home?
To pull equity out of your home, you’ll need to get in contact with a lender that offers financial tools that can grant you access to your equity. These may include home equity loans, HELOCs, or cash-out refinances. You may also consider selling your home or getting into an agreement with an equity-sharing company.
What is the best way to release equity from a house?
The best way to pull equity from your house is the one that helps you meet your financial goals. If you need to remodel your home and you know exactly how much it is going to cost, a home equity loan may work best. But if you want simplified finances, a single payment from a cash-out refi could be the answer.
Photo credit: iStock/Korrawin
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All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
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