Can you take equity out of your home without refinancing?
Yes, you can take equity out of your home without refinancing your current mortgage. Due to currently high mortgage interest rates many homeowners are choosing to keep their low rate and use other types of loans to get the cash they need.
Read on to learn more about how to get equity out of your home without refinancing.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What is home equity and how does it work?
Home equity or equity in a house refers to the difference between the balance on your mortgage and the market value of your home; it is the amount of your home that you own that is not encumbered by a first or second mortgage loan. For example, if you do not have a mortgage, then you have one hundred percent equity. If you have a mortgage, the lender "owns" part of your home. As you pay off your mortgage your equity (the amount of the home you own) increases.
What is cash-out refinancing?
A
cash-out refinance involves getting a new mortgage at a new interest rate and borrowing more than what you owe on your current mortgage. The first mortgage is paid off and the extra cash is given to you at closing. If you already have a low interest rate on your current mortgage, refinancing to a higher interest rate just to get cash-out, is probably not a good idea because you will lose your low interest rate which could cost you more in the long run.
Pros and cons of cash-out refinancing
Getting cash-out in a mortgage refinance can help homeowners obtain large, lump sum cash payments that can be used for any purpose. However, in today's high interest rate environment, refinancing may not be the best choice for obtaining cash. Each homeowner's personal finance situation is different, so consider the
pros and cons of cash-out refinancing before you sign for a loan.
How to use the equity in your home without refinancing
If you already have a mortgage interest rate that's lower than the rates available today, here are some other ways you can use the equity in your home without refinancing:
Home equity line of credit (HELOC).
A
Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender. HELOCS come with a credit limit, a variable interest rate, and are secured by the equity in your home. One of the benefits of a HELOC is that you only pay interest on the amount of the loan you actually use.
See if you meet the HELOCs eligibility requirements.
Home equity loan.
A
home equity loan lets you borrow money against the equity in your home. Home equity loans provide money in a lump sum payment and come with a fixed interest rate. Starting the month after you receive the loan, lenders require that the loan be paid back in monthly installments that include paying interest on the entire loan amount, whether you used any of the money or not.
Home equity agreement (HEA).
Sometimes referred to as a home equity investment or home equity sharing, the homeowner agrees to share their home equity and the property's appreciation over time with investors. In exchange, the homeowner receives a lump sum of money. You do not have to sell your home to enter an HEA, however, when you do sell your home, the investor is repaid the amount of money that was given at the start of the arrangement.
Sale-lease agreement.
Also known as a rent-back agreement, this agreement is established when a homebuyer allows the home seller to pay rent to remain in their former home for a fixed period after the closing and sale of the home. Because the seller has received the proceeds of their home sale, they'll have more cash on-hand to make a new home purchase. These agreements are typically short-term and require the sale of your home.
Reverse mortgage.
This home loan is available to homeowners aged 62 and older. According to the Federal Trade Commission, with a reverse mortgage, the amount of money you can borrow is based on how much equity you have in your home. (Your equity is how much money you could get for your home if you sold it, minus what you owe on your mortgage.) While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky because the amount the homeowner owes to the lender goes up, not down, over time because lenders charge fees and interest on the amount they give you.
Personal loan.
A
personal loan is a type of “unsecured loan” granted to an individual based on their creditworthiness (not collateral) and is given in a lump sum. Repayments are made as fixed amount "installments" based on the loan's fixed interest rate over a fixed period. Monthly payments include paying back the principal balance and interest on the loan. Personal loans can be used for any type of expenses you choose.
Sell and downsize.
With the real estate housing market still going strong, many homeowners have been cashing-in on the appreciation of their home over the past several years since they purchased the property. You too may decide to sell your home and use some of the money to buy a smaller home, and use the rest of the money to pay off debt and invest in your
retirement savings or a
savings accounts that earns interest.
How to take equity out of your home
The process for taking equity out of your home is easy and straight forward, just follow these steps:
Calculate your home equity. To calculate home equity, take the amount your property is currently worth, or the appraised value, and subtract the amount of any existing mortgages on your property.
For example: Appraised value $600,000 – Amount owed on mortgage $250,000 = $350,000 equity. Divide the equity ($350,000) by the home value ($600,000), which is 58% equity. (A homeowner who doesn’t have a mortgage loan has 100% equity in their home.)
Check your finances. It's generally not a good idea to take equity out of your home if your job or income are not stable, you are having difficulty making your current mortgage payments, or you do not plan to stay in your home for very long. If you are making all your debt payments on-time and have a steady income to rely on, taking on an additional loan payment could help you improve your financial situation, if you use the money to pay off debt or make home improvements that increase your home value.
Compare options. Lenders are competing with your business so be sure to shop around for the lowest interest rate and best terms that match your financial needs.
What is the best option for taking equity out of a home?
The best option is the one that works easily with your income, monthly expenses, and personal financial goals. While getting the extra cash you need based on home equity will give you a monthly payment as you repay the loan, the loan should improve your overall financial situation.
When is the best time to take equity out of a home?
The best time to take equity out of your home is when your finances are in order, you have reliable income with which to repay a home equity loan, and have a plan for using the loan, such as making home improvements to increase the value of your home. Taking equity out of your home when the real estate market is high could give you access to more cash due to a decreased
loan-to-value (LTV) ratio, which means less risk for the lender.
What are the downsides to taking equity out of a home?
There are
home equity loan pros and cons to be aware of, however, the main disadvantage is that your home will be used as collateral: Failure to make on-time monthly payments to repay the loan will hurt your credit score. If you default on the loan, the lender can take possession of the home through a foreclosure.
When is a cash-out refinance the best option?
A
cash-out refinance involves getting a new mortgage at a new interest rate and borrowing more than what you owe on your current mortgage. The extra cash is given to you at closing. A cash-out refinance is the best option if you can get an interest rate that's lower than the rate you have now. If you already have a low interest rate on your current mortgage, refinancing to a higher interest rate just to get cash-out, is probably not a good idea because you will lose your low interest rate which could cost you more in the long run.
Does taking equity out of your home have tax implications?
There may be a tax benefit to people who get a home equity line of credit (HELOC) or home equity loan and use the money in very specific ways. According to the IRS, the interest paid on a home equity loan or HELOC is
tax deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan.
Is taking equity out of your home worth it?
A HELOC or home equity loan can be a great financial tool for using your home equity to get some extra cash. But is it worth it? The first thing to do is run the numbers and honestly evaluate your personal finances. Deciding how to get equity out of your home without refinancing can seem overwhelming, so take your time and speak with your financial advisor or tax professional if you're not sure it's right for you. The questions to ask yourself are, will the loan put me in a better financial position, and can I afford to make the monthly loan payments? If you can answer yes to these questions, then pulling equity out of your home without refinancing may be worth it.
Just remember, any loan that requires your home to be used as collateral could jeopardize your home ownership if you become unable to repay the loan. Only you can truly determine the best time to take equity out of your home.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!