If you’ve owned your home for a while, there’s a good chance you’ve built equity through mortgage payments, changes in property value, or both. Selling is one way to turn that equity into cash, but what if you’d rather stay where you are? There are several ways you may be able to access part of your equity without selling. Before choosing one, it helps to understand how each works, what it costs, and what you’re committing to in return.
Start with the basics. Your home equity is generally the difference between your home’s current value and what you still owe on loans secured by it. How much of that equity you can access will depend on the type of financing, the lender or provider, your qualifications, existing mortgage debt, the property’s value, and other factors.
The four options below work differently, so rather than asking which one is “best,” consider what each would mean for your particular situation.
- Home Equity Loan – If you know approximately how much money you need and would prefer to receive it all at once, a home equity loan may be one option to explore. You generally receive a lump sum and repay it over a set period, commonly at a fixed interest rate.
That structure can be useful for a large planned expense, such as a major home improvement project, particularly if predictable payments are important to you.
But consider the other side of the decision too. A home equity loan creates additional debt secured by your home, and failure to repay it could ultimately put the property at risk. Look beyond the amount you can borrow and compare the interest rate, fees, closing costs, monthly payment, and total cost over the life of the loan.
- Home Equity Line of Credit (HELOC) – If you don’t need all of the money at once, a HELOC works differently. It is a revolving line of credit secured by your home. During the draw period, you can generally borrow as needed, repay some or all of what you’ve borrowed, and potentially borrow again up to the available limit.
That flexibility may make sense for expenses that occur over time, such as a remodeling project completed in stages. You generally pay interest based on the amount you’ve actually borrowed rather than the entire credit line.
Before choosing a HELOC for its flexibility, however, understand what can change. HELOCs commonly have variable interest rates, so the rate and payment may rise. There may also be fees and different rules during the draw and repayment periods. Ask what your payments could look like later, not just what they look like when the credit line opens.
The next two options require a different way of thinking about your equity. A reverse mortgage is designed primarily for older homeowners and works differently from a traditional mortgage. A home equity contract or investment may provide cash without a conventional loan but creates a future financial obligation tied in some way to the home’s value. Both deserve careful consideration.
- Reverse Mortgage – For certain older homeowners who want to remain in their homes, a reverse mortgage may be another option to explore. The most common type, the federally insured Home Equity Conversion Mortgage (HECM), is generally available to qualifying homeowners age 62 and older.
Depending on the loan and circumstances, proceeds may be available in different ways. Instead of making traditional monthly mortgage payments, interest and fees are generally added to the balance, causing the amount owed to increase over time.
The homeowner retains ownership but also retains important responsibilities, including using the property as a principal residence, paying property taxes and homeowners insurance, and maintaining the home. The loan generally becomes due when the borrower sells the home, permanently moves out, or the last surviving borrower dies.
If this option interests you, take the time to understand both what it can provide now and what it may mean for your remaining equity later. The Federal Trade Commission provides information about reverse mortgages, their costs, and questions to consider.
- Home Equity Contract or Investment – This option can sound appealing because some providers offer homeowners a lump-sum payment without structuring the transaction as a traditional loan. In return, however, the homeowner agrees to a future payment tied in some way to the home’s value.
These arrangements may be called home equity investments, home equity agreements, home equity sharing, or similar names, and the terms can vary considerably.
If you’re considering one, don’t stop at the amount of cash being offered today. Find out how the future payment will be calculated, what fees apply, what happens if the home rises or falls in value, how renovations may affect the calculation, whether a lien will be placed on the property, and when repayment is required. Understanding the ending is just as important as understanding the beginning.
LOOK AT THE DECISION FROM BOTH DIRECTIONS
Before accessing your equity, ask yourself what you need the money for, how long you expect to remain in the home, and how comfortable you would be with the obligation you’re taking on.
Then compare the total cost, monthly payment requirements, interest-rate risk, fees, repayment terms, and what happens if your plans change. A solution that works well for one homeowner may be a poor fit for another.
An appropriate mortgage professional, financial advisor, housing counselor, attorney, or other qualified professional can help you evaluate the details of a particular product and how they apply to your financial situation.
If you’re also wondering whether selling, downsizing, or making another real estate move belongs among your options, I can help with that part of the conversation. I can provide information about your home’s current market position and help you understand the real estate choices available to you.
Your home equity may give you more than one path forward. Take the time to understand where each path leads before deciding which one is right for you.