No matter the reason, you have options when it comes to unlocking your home wealth. If you're wondering, "How can I take equity out of my home?" you're in the right place. In this post, we'll guide you through how to gauge your equity, the ins and outs of pulling equity out of your home, and how to weigh your options.
What is equity?
Equity is the piece of your home you own outright compared to the lender's stake. In other words, how much your home is worth, minus what you owe on your mortgage. For example, let's say your home is worth $250,000, and you still owe $100,000 on the mortgage. In this scenario, you own 60% equity in the property.
How to pull equity out of your home: a step-by-step guide
Calculate your equity
To leverage your equity, you'll first need to know how much equity you own. You can use a calculator to gauge this, but a recent appraisal will provide the most accurate information. Although requirements vary from product to product, most lenders require at least 20% equity left over after you pull equity out of your home.
Assess your financial health
Evaluating your current financial situation will help you decide the equity withdrawal options best suited to your needs.
Requirements differ between lenders, but all assess eligibility based on several factors:
- Loan-to-value (LTV) ratio: LTV ratio is a measure comparing the amount of your mortgage with the appraised value of your home, represented as a percentage. Most lenders will use this metric when deciding if you qualify as a borrower and require an LTV of no more than 80%.
- Combined loan-to-value (CLTV) ratio: CLTV represents the total percentage of your property securing loans.
- Credit score: Competitive products require a credit score of 680 or higher to qualify. However, some lenders have requirements of 620 or higher, so shopping around is essential.
- Debt-to-income (DTI) ratio: Lenders use DTI to gauge your risk as a borrower. It's represented as a percentage that reflects your total monthly debts divided by your gross total income. Many lenders require a DTI of 43% or less.
- Income: Most lenders will require a work history of at least two years to prove you have a stable income.
Weigh your options
Understanding the products available to you and how they affect your short- and long-term finances can help you better make an informed decision. Each option comes with its own terms, costs, and potential risks, so being well-informed will empower you to make the choices that will benefit you the most. With any financial product that is secured by your home, you risk losing that home if you fall behind on your payments.
Home equity loan
A home equity loan is a second mortgage you take out by accessing your home's equity. It's a common way to pull equity out of a house. To secure your home loan, you offer up your property as collateral. You receive a lump sum upfront and repay via monthly payments.
You need at least 15% to 20% equity in your home after the loan – or a CLTV no higher than 80% or 85%.
- The interest rate is typically lower than a credit card or personal loan.
- You’ll have a fixed interest rate — payments will stay the same over the life of the loan.
- You'll receive a large lump sum.
- You’ll have pricey monthly payments for years.
- You’ll need to pay closing costs.
Best for: Borrowers who are comfortable shouldering long-term debt, financially prepared for extra monthly expenses, and want predictable payments.
A cash-out refinance is another common way to convert the equity in your home into cash. You take out a larger home loan, then pocket the difference. Unlike taking out a second mortgage, a cash-out refinance doesn’t create monthly payments. Instead, it replaces your existing mortgage, leaving one loan payment per month.
To qualify for a cash-out refinance, you need at least 20% equity in your home or a CLTV that's no higher than 80%.
- You'll have one monthly payment instead of keeping track of multiple loans.
- The credit requirements are generally more forgiving than HELOCs or home equity loans.
- You can change the term and structure of your mortgage as you see fit.
- Your monthly mortgage payment will often rise, especially if you currently have a low rate.
- You'll have to pay high closing costs.
Best for: Borrowers who want access to cash and don't mind changing their mortgage rate. Given the current economic environment, you'd likely be locked into a higher rate.
Home equity line of credit
A Home equity line of credit (HELOC) works similarly to a credit card. Using your equity as collateral, you can open a revolving line of credit to draw on when needed. HELOCs feature a draw period, which is usually ten years. Once your draw period ends, your repayment period begins.
HELOCs come with variable interest rates. As a result, your monthly payments can go up and down and are more unpredictable. To qualify, you need at least 15% to 20% equity in your home or an LTV no higher than 80% or 85%.
- HELOCs have a lower interest rate and sometimes come with fee waivers.
- You'll have the flexibility to draw on funds when you need it.
- During the draw period, you can make interest-only payments.
- A variable rate makes monthly payments less predictable.
- It's easy to overuse, creating a risk of running up a high balance.
Best for: Borrowers who aren't sure how much financing they need and prefer flexibility in repayment schedule and how much they borrow.
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Home Equity Investment (HEI)
Another way to tap into your home's wealth is with a Home Equity Investment (HEI). With an HEI, you get upfront funds for a portion of your home's future appreciation. Homeowners can buy back their equity any time during a 30-year term, and there are no monthly payments, ever. You need at least 30% equity in your home or an LTV no higher than 70% to qualify.
- HEIs have easier requirements than other home equity products — a credit score of at least 500 and no income verification.
- There are no monthly payments.
- You can use your funds however you please.
- You'll have closing costs and fees to pay.
- HEIs are only available in some states.
Best for: Borrowers with not-so-great credit or a low or fixed income who want to avoid dealing with pricey monthly payments.
If you're 62 or older, a reverse mortgage is another way to pull equity out of your home. With a reverse mortgage, you use your home as collateral for a loan. You don't owe anything on the loan until you sell your home, pass away, or no longer meet the strict conditions you agreed to. You need at least 50% equity in your home or an LTV no higher than 50% to qualify.
An important part to note about reverse mortgages is the acceleration upon death. This condition lets the lender request full repayment if you no longer live in your home – this can make it challenging for homeowners who hope to pass on their home to their heirs.
- Depending on your age, a reverse mortgage enables you to cash out the largest amount of your equity.
- You can age in place.
- Most reverse mortgages don't consider your credit score.
- The balance will become immediately due if you fail to meet the requirements.
- You'll need to pay off your mortgage – if you have one.
Best for: Borrowers who want to age in place and are comfortable maintaining strict requirements.
Apply for your home equity solution
After understanding your options, the next crucial step is to initiate the application process. Most application procedures are similar whether you opt for a home equity loan or a HELOC. You'll need to gather essential financial documents, such as proof of income, a list of your current debts, and details about your property. Once you've chosen a lender and submitted your application, be prepared for a thorough evaluation of your financial situation.
Since requirements vary from lender to lender, it's best to have your finances ready for review. A few key pieces of information or documents you'll likely need to provide are:
- Estimated property value
- Copy of the deed
- Mortgage statement
- Tax assessment
- Current taxes, insurance, dues, and mortgage lien information
- Original purchase price
- Date of the original purchase
- When the home was built
- Trust agreement (if applicable)
Tips to help you pull equity out of your home
Here's how to maximize your borrowing potential and how to get the most equity out of your home:
- Build equity in your home. The more equity you have in your home, or the lower your LTV ratio, the higher the amount you can likely be approved for.
- Build strong credit. Over time, you can boost your credit by practicing good "credit habits." For instance, always pay on time, keep your credit usage low, keep accounts open, don't apply for new credit unless you need to, and have a diverse mix of credit, such as credit cards and loans.
- Keep a low DTI. As mentioned, the lower your debt-to-income ratio, the less risky of a borrower you will appear to be in the eyes of lenders. So, focus on paying down that debt whenever and wherever possible.
The beauty of pulling equity out of your home to cover expenses or fund a big-ticket purchase or project is that there are a number of options. The best choice to get equity from your home hinges on your situation, needs, and preferences. Knowing the ins and outs of each and how the application process works will help you make an informed decision.
If you'd like an option where you don't have to worry about monthly payments, a Point HEI might be the right choice for you. Not only are there no monthly payments, but there are no income requirements and you don't need stellar credit.