4 Simple Ways to Get Cash From Your Home
If you have owned your home for a while, rising property values and years of mortgage payments may have helped you build substantial equity. Selling the home is one way to turn that equity into cash, but it isn’t the only one. If you would rather stay where you are, several financial products may allow you to access part of your equity without selling. The important thing to remember is that getting cash from your home usually comes with a cost, a new financial obligation, or both.
Your home equity is generally the difference between your home’s current value and what you still owe on loans secured by the property. How much of that equity you may be able to access depends on the type of financing, the lender or provider, your qualifications, the property’s value, existing mortgage debt, and other factors.
Here are four common ways homeowners may be able to access some of that equity while continuing to own the home.
- Home Equity Loan – A home equity loan allows you to borrow against your home’s equity, typically receiving the proceeds as one lump sum. These loans commonly have a fixed interest rate and are repaid over a set period.
This can make them useful when you know approximately how much money you need for a specific expense, such as a major home improvement project or another large planned cost. The predictable payment structure may also appeal to homeowners who prefer knowing what their payment will be over the life of the loan.
Because your home secures the loan, however, this is not simply a way to withdraw money from an account. You are taking on additional debt, and failure to repay the loan could ultimately put the home at risk. Compare interest rates, fees, closing costs, monthly payments, and the total cost of borrowing before deciding whether this approach makes sense.
- Home Equity Line of Credit (HELOC) – A HELOC is a revolving line of credit secured by your home. Instead of receiving all of the available money at once, you generally have a period during which you can borrow from the credit line as needed, repay some or all of what you borrowed, and potentially borrow again up to the available limit.
This flexibility can make a HELOC useful when expenses occur over time, such as a remodeling project completed in stages. You generally pay interest based on the amount you have borrowed rather than the full amount of credit available to you.
HELOCs commonly have variable interest rates, which means the rate and payment can change. They can also have fees, borrowing requirements, and separate draw and repayment periods. Payments may increase when the repayment period begins, so make sure you understand how the HELOC works both while you’re borrowing and after the draw period ends.
Two other ways of accessing home equity work quite differently from a traditional home equity loan or HELOC. Reverse mortgages are designed primarily for older homeowners, while home equity contracts or investments involve exchanging access to some of your home’s current equity for a financial obligation tied to the home’s value. Both deserve especially careful review before signing an agreement.
- Reverse Mortgage – A reverse mortgage is a home loan that allows certain older homeowners to borrow against their home equity without making the traditional monthly mortgage payments required by 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 rather than simply as regular monthly payments. Interest and fees are added to the loan balance over time, so the amount owed generally increases rather than decreases.
The homeowner continues to own the home but must meet important requirements, including using it as a principal residence, paying property taxes and homeowners insurance, and maintaining the property. The loan generally becomes due when the borrower sells the home, permanently moves out, or the last surviving borrower dies. The Federal Trade Commission provides information about reverse mortgages, their costs, and questions to consider before applying.
- 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 home’s value. These arrangements may be marketed as home equity investments, home equity agreements, home equity sharing, or similar names.
They are not all structured the same way, and the amount eventually owed can depend on the specific contract and what happens to the home’s value. Some agreements may also create a lien against the property and require repayment after a set number of years, when the home is sold, or when another event specified in the contract occurs.
Because these products can be complex, read the agreement carefully and make sure you understand how the final payment is calculated, what fees apply, what happens if the property rises or falls in value, whether renovations affect the calculation, and how you would repay the obligation when it comes due.
BEFORE YOU TAP YOUR HOME EQUITY
Start by asking why you need the money and how long you expect to remain in the home. Then compare the total cost, monthly payment requirements, interest-rate risk, fees, repayment terms, and what happens if your plans or financial circumstances change.
Remember that home equity isn’t free money. With a home equity loan or HELOC, you’re borrowing against the property. With a reverse mortgage, the loan balance generally grows over time. With a home equity contract or investment, you may be committing to a future payment tied to the property’s value. Each option can affect how much equity remains available to you later.
Before making a decision, consider speaking with an appropriate mortgage professional, financial advisor, housing counselor, attorney, or other qualified professional who can help you evaluate the particular product and your financial situation.
If you’re also wondering whether selling, downsizing, or making another real estate move should be part of the conversation, that’s where I can help. I can provide information about your home’s current market position and help you understand the real estate options that may be worth considering alongside the financial ones.
Your equity may give you choices. Before using it, make sure you understand not only how much cash you can receive, but what it will cost to access it—and what the decision may mean for the equity you have left later.