How to pull equity out of your home

When you pull equity out of your home, you're drawing on your home's wealth to cover upcoming expenditures — such as home improvement projects, high-interest debt, or a big-ticket expense.

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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.

How to determine equity in a home

Equity is the piece of your home you own outright—in other words, how much your home is worth minus any debts tied to the property. This can include your mortgage loan balance and any liens on the property.

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To determine your home’s equity, you’ll need to know the value of your property. A professional appraisal, a comparative market analysis (CMA) from a real estate agent, or an online home value estimator can help you gauge this.

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Once you have an idea of your home’s value, subtract the remaining balance on your mortgage or any other outstanding loans secured by the property.

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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.

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Most lenders require at least 20% equity left over after you pull equity out of your home. If you have sufficient equity, then read on.

How to pull equity out of your home

Assess your financial situation

Your ability to access home equity will depend largely on your financial standing, especially your credit score and debt-to-income ratio. Higher credit scores generally qualify for lower interest rates and better loan terms.

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Requirements differ between lenders, but all assess eligibility based on several factors:

• Loan-to-value ratio (LTV): LTV ratio is a measure comparing the amount of your mortgage balance 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%.
• 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 ratio (DTI): 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.

Choose the right product for your needs

Understanding the products available to you and how they affect your short- and long-term finances can help you better make an informed decision.

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 fixed monthly payments.

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You need at least 15% to 20% equity in your home after the loan – or a CLTV no higher than 80% or 85%.

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Pros

• 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.

Cons

• You’ll have pricey monthly payments for years.
• You’ll need to pay closing costs.

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Best for: Borrowers who are comfortable shouldering long-term debt, financially prepared for extra monthly expenses, and want predictable payments.

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.

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To qualify, you need at least 15% to 20% equity in your home or an LTV no higher than 80% or 85%.

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Pros

• 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.

Cons

• A variable rate makes monthly payments less predictable.
• It's easy to overuse, creating a risk of running up a high balance.

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Best for: Borrowers who aren't sure how much financing they need and prefer flexibility in repayment schedule and how much they borrow.

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.

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You need at least 30% equity in your home or an LTV no higher than 70% to qualify. Unlike a home equity loan or HELOC, an HEI has no income requirements, making it a more favorable option for low-income or self-employed homeowners.

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Pros

• 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.

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Cons

• You'll have closing costs and fees to pay.
• HEIs are only available in some states.‍

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Best for: Borrowers with not-so-great credit or a low or fixed income who want to avoid dealing with pricey monthly payments.

Cash-out refinance

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.

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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%.

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Pros

• 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.

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Cons

• Your monthly mortgage payment will often rise, especially if you currently have a low rate.
• You'll have to pay high closing costs.

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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.

Reverse mortgage

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.

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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.

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Pros

• 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.

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Cons:

• 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.

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Best for: Borrowers who want to age in place and are comfortable maintaining strict requirements.

Shop around

Just as with your original mortgage, it pays to shop around for the best terms. Interest rates, fees, and loan terms can vary widely between lenders. Get quotes from multiple sources and prequalify when possible.

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Be sure to compare the following:

• Interest rates (fixed vs. variable)
• Loan terms
• Closing costs and other fees
• Prepayment penalties

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Don’t be afraid to negotiate better terms based on competing offers.

Apply

Once you’ve selected a lender and product type, it’s time to apply. You’ll typically need to provide:

• Proof of income (pay stubs, tax returns)
• Credit report and score
• Outstanding mortgage balance
• Overview of current debts

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The lender will evaluate your financial profile, home value, and equity to determine the loan amount and terms. The lender will most likely schedule a home appraisal. Once approved, the closing process will follow, much like a regular mortgage.

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 strong credit. Over time, you can boost your credit by practicing good "credit habits."
• Keep a low DTI. Focus on paying down that debt whenever and wherever possible.
• Invest in your property. Since home prices impact your share of equity, making home improvements to increase home value can help boost your equity.

Frequently asked questions

What is the downside of taking equity from your home?

The downsides of drawing on your home's equity are the upfront costs, the potential for foreclosure, and the risk of a downturn in the housing market that could result in you owing more than your home is worth.

What is the quickest way to get equity out of your home?

Home equity loans are often the fastest way to draw equity. However, actual timelines vary from lender to lender and depend on the complexity of your applications. The timeframe for equity products is a few weeks to a few months.

Final thoughts

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.

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If you'd like an option where you don't have to worry about monthly payments, Point's 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.

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