With current mortgage rates above 6%, many homeowners are reluctant to do a cash-out refinance. Although they want to tap their home equity, refinancing could cause them to lose their low mortgage interest rate.
Even if the current mortgage has a higher interest rate, cash-out refinancing often requires paying closing costs or could increase your mortgage payments. Homeowners who want access to their equity often wonder, “Can you pull equity out of your home without refinancing?”
What is a cash-out refinance?
A cash-out refinance is when you refinance your existing mortgage with a larger loan than your current loan amount. The difference between your loan amounts is the cash out you’ll receive, minus any fees, impounds and other costs that your new lender may charge.
Getting a cash-out refinance is one of the ways you can access the equity in your home. You can use the money for anything you like, such as home repairs or upgrades, college tuition, debt consolidation, starting a business or paying for a wedding.
While this financing option can be a good choice for some homeowners, it isn’t a good idea for everyone. Refinancing your mortgage restarts your loan term, and pulling out cash can increase your mortgage payments.
Additionally, your credit and personal finances may have deteriorated since your original loan. The interest rate may be higher on a new loan, or the lender could decline your application.
Pros and cons of refinancing
Pros
- Access your home equity. You can take advantage of rising home values by pulling out cash.
- Spreads payments over a longer term. Repaying the cash out is spread out over the loan’s term, so increases in monthly payment could be small.
- Lower interest rates. Mortgages are secured by your home, which generally leads to lower interest rates.
Cons
- Resets your loan term. When you get a new loan, the loan term resets to 30 years unless you pick a shorter term. This longer repayment period can keep you in debt longer than you originally intended.
- Closing costs. Getting a new loan can result in expensive closing costs, such as title insurance, appraisal costs, origination fees and points.
- Home is at risk. Since your home secures the new loan, you could lose your home if you are unable to handle the new, larger mortgage payments.
Refinancing alternatives
A cash-out refinance is just one of the many financing options available to homeowners. Before submitting your application, compare it against these other loan types to determine which is best for your situation. Here's how to get equity out of your home without refinancing:
Home equity loan
A home equity loan is a fixed-rate loan that provides a lump sum of cash out from your real estate. If you need additional money, you need to apply for another loan. These loans are in second position to your primary mortgage, and your existing mortgage terms do not change.
- Loan amount: Between 80% and 85% of your equity
- Repayment term: 5 to 30 years
- Requirements: 15% to 20% equity, a 620 credit score or higher, a max DTI of 45%, and sufficient income
Home equity line of credit (HELOC)
A HELOC acts like a home equity loan, but it is a line of credit instead of a lump-sum distribution. You can withdraw and repay money throughout the draw period (typically 10 years). When the draw period ends, the remaining balance automatically converts to an amortizing loan.
- Loan amount: 80% to 85% of your equity
- Repayment term: 10 to 20 years
- Requirements: 15% to 20% equity, a credit score above 620, a DTI below 45%, and sufficient income
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Home equity investment (HEI)
Home equity investments (HEIs) provide access to your home’s equity without requiring monthly payments or interest charges. Many homeowners can also qualify without income verification or with lower credit scores than a traditional mortgage. You’ll receive a lump sum of money in exchange for sharing your home’s equity and appreciation with the lender. You can repay at any time (max term of 30 years) or when you sell your home.
- Amount: $20,000 to $500,000
- Repayment term: 30 years; no monthly payments
- Requirements: Sufficient equity, a credit score of 500 or above, no income requirements
You can prequalify without impacting your credit.
Reverse mortgage
Reverse mortgages provide a lump sum, line of credit or a stream of payments to eligible seniors. These loans do not require monthly payments, but interest charges continue to accrue and can increase your loan balance. You’ll pay off the loan when the home is sold. In some cases, the balance becomes due if you move out of the home for an extended period of time. For example, if you move into a nursing home.
- Loan amount: Various based on the type of reverse mortgage; can generally access more the older you are
- Repayment term: Repaid when the borrower sells the home or passes away
- Requirements: aged 62 or older, own at least 50% equity, have sufficient income
Streamline refinance loan
A streamline refinance is an FHA mortgage program that allows homeowners with lower credit scores to refinance their homes with less paperwork. This program focuses on lowering mortgage payments for borrowers. While these loans are helpful to some borrowers, unfortunately, they are a poor choice if you're looking to pull cash out. The FHA limits cash out to just $500 with an FHA Streamline Refinance.
- Loan amount: Cannot exceed $500
- Repayment: Rolled into the new mortgage
- Requirements: An FHA-insured mortgage, current with mortgage payments for at least six months
Personal loan
Honorable mention
Personal loans are unsecured loans that provide quick access to cash. They generally have higher interest rates and shorter repayment periods than loans secured by your home. Personal loans typically have lower costs than refinancing, but some lenders charge application fees or origination points that can increase your costs. Qualification tends to be faster than a home loan since they do not require an appraisal.
- Loan amount: $1,000 to $100,000
- Repayment term: 1 to 7 years
- Requirements: Vary by lender; many lenders offer loans for bad credit borrowers
How to get started pulling equity out of your home
Before you can do a cash-out refinance or use another option to pull money from your real estate, take three simple steps first.
Calculate your home equity
Knowing how much home equity you have helps to determine how much cash you can pull out. Each lender has a maximum loan-to-value (LTV) they’ll lend against a house, so this information also helps to narrow down prospective lenders.
To calculate your home equity, subtract your mortgage balance from your home’s value. An appraisal provides an independent value of your home, but you can also speak with a real estate agent or use an online website to get an estimate of its worth.
For example, if your home is worth $400,000 and you owe $280,000, you’re at a 70% LTV. If your lender lets you borrow up to 80% LTV, you can cash out $40,000 of your home’s equity.
Assess your financial health
Lenders analyze your financial health when underwriting loans. They’ll review your income, debt obligations, credit score and other factors.
Your debt-to-income ratio (DTI) is the ratio of your minimum debt payments and your income. Add up all of your minimum payments on your debts, then divide that total by your gross income. This includes your current mortgage, auto loans, student loans, credit cards and other debts, but not monthly payments like groceries, utilities and other bills.
Someone with $1,800 of minimum debt payments against $5,000 gross monthly income has a DTI of 36%. Many loan programs have maximum DTI limits, so consider how your new loan may impact this ratio.
Credit scores are another factor that can determine your interest rate and fees, or even if a lender will let you borrow money. Many banks and websites provide credit scores for free. To improve your score, get your credit report for free at AnnualCreditReport.com, then dispute any errors and take steps to reduce your debt.
Compare financing options
When comparing financing options, consider how the repayment terms align with your goals. A shorter repayment period can result in less interest charges but also higher monthly payments. Longer loan terms may have lower payments. However, longer repayment costs more over the life of the loan and could saddle you with debt longer than you’d like.
Interest rates and fees vary among lenders. Even when you’ve settled on a type of financing, get at least three quotes from different lenders to find the best deal. Ask your lender if there’s anything you can do to qualify for better loan terms.
Final thoughts
Getting a cash-out refi can be a good idea when current rates are lower than your existing mortgage. However, closing costs and an extended repayment period of a new mortgage may not be worth it for some homeowners. If you're wondering, "Can you pull equity out of your home without refinancing?" The answer is yes. There are multiple financing options homeowners can pursue that don't impact their current mortgage.
