Home equity usually isn’t something you build overnight. It may represent years of mortgage payments, improvements, maintenance, and changes in your home’s value. So if the day comes when you’d like to access some of it without selling your home, it’s worth understanding exactly what you’re doing. There are several ways to turn part of that equity into cash, but each asks for something in return. Knowing what that is can help you protect what you’ve worked so long to build.
Your home equity is generally the difference between what your home is worth today and what you still owe on loans secured by it. Depending on your circumstances, some of that equity may be accessible without selling the property.
How much you can access—and what it will cost—depends on the option you choose, the property, your existing mortgage debt, your qualifications, and the lender or provider. Here’s what to know about four possibilities you may encounter.
- Home Equity Loan – Sometimes you know exactly why you need the money. Maybe there’s a major improvement you’ve been planning or another large expense that needs to be handled at once. A home equity loan generally provides a lump sum and is repaid over a set period, commonly at a fixed interest rate.
The predictability can be reassuring. But remember what stands behind the loan: your home. You’re taking on additional debt secured by the property, and failure to repay could ultimately put it at risk.
Before borrowing, look beyond the amount you’ll receive. Make sure you understand the interest rate, fees, closing costs, monthly payment, and total amount you’ll pay over the life of the loan.
- Home Equity Line of Credit (HELOC) – Life doesn’t always hand us expenses in one convenient lump sum. A HELOC can provide more flexibility by giving you a revolving line of credit secured by your home.
During the draw period, you can generally borrow when needed, repay some or all of what you’ve borrowed, and potentially borrow again up to the available limit. That can be useful for projects or expenses that happen over time.
Just make sure flexibility today doesn’t create an uncomfortable surprise later. HELOCs commonly have variable interest rates, which means the rate and payment can rise. There may also be different requirements during the draw and repayment periods. Understand what the obligation could become—not only what it is when you begin.
There are also options that work very differently from a traditional home equity loan or HELOC. Reverse mortgages are designed primarily for older homeowners, while home equity contracts or investments create another kind of future financial obligation. If either one is being considered, give yourself plenty of time to understand the details.
- Reverse Mortgage – For some older homeowners, being able to remain in a familiar home is an important part of the decision. A reverse mortgage may provide a way for certain homeowners to access equity without making the traditional monthly mortgage payments associated with many other loans. 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. Interest and fees are generally added to the balance, so the amount owed grows over time.
You continue to own the home, but you also continue to have responsibilities. These include using the property as your principal residence, paying property taxes and homeowners insurance, and maintaining the home. The loan generally becomes due when you sell the property, permanently move out, or the last surviving borrower dies.
For something that can affect both your home and your future equity, questions are a good thing. The Federal Trade Commission provides information about reverse mortgages and important things to consider before making a decision.
- Home Equity Contract or Investment – Some companies offer homeowners a lump-sum payment today in exchange for a future payment tied in some way to the value of the home. You may hear these arrangements called home equity investments, home equity agreements, or home equity sharing.
Receiving money without taking out a traditional loan may sound appealing, but these agreements can be complex. Before signing one, make sure you understand how the future payment is calculated, what fees apply, what happens if your home rises or falls in value, whether improvements affect the calculation, whether a lien will be placed on the property, and when repayment is required.
You spent years building the equity. It’s reasonable to take your time before signing an agreement that determines how much of it you’ll keep later.
PROTECT THE VALUE YOU’VE BUILT
There are all kinds of reasons someone might need or want access to home equity. A major repair. An improvement. A change in family circumstances. Retirement planning. An unexpected expense. The reason is personal, which is exactly why the decision deserves careful thought.
Consider how much money you actually need, how long you expect to remain in the home, what the option will cost, and what obligation it leaves behind. Then talk with an appropriate mortgage professional, financial advisor, housing counselor, attorney, or other qualified professional who can help you understand the financial details of the particular product you’re considering.
And if part of the question is whether staying in the home still makes sense, I’m here for that conversation too. I can help you understand your home’s current market position and what selling, downsizing, or another real estate move might look like, so you can consider those possibilities alongside the financial ones.
Your home equity may be measured in dollars, but building it took time. Whatever you decide to do with it, make sure the choice respects both.