Updated for May, 2024
A house is an important asset. In fact, it is probably the most valuable thing you own. And fortunately, there are ways to tap into that value and turn it into cash, even without selling your home. If you need a large sum of money, perhaps for a home remodel or to consolidate debt, you may be tempted by a cash-out refinance. A cash-out refinance replaces your existing mortgage loan with a larger loan. The new loan is large enough to pay off your current loan and pay you cash at closing. However, some folks may want to keep their original mortgage. In this article, we’ll cover alternatives that enable you to access home equity without refinancing.
Can you access home equity without refinancing?
Yes. A home equity loan, a home equity line of credit, and a reverse mortgage all allow you to tap into the value of your home without having to refinance your mortgage.
What is home equity?
Simply put, equity is the difference between what your home is worth, and what you owe on your current mortgage. In other words, if you owe $150,000 on your mortgage loan and your home is worth $200,000, you have $50,000 of equity in your home. When you access your equity, you can spend that $50,000 on anything.
Downsides of Refinancing
You might be asking yourself why not just refinance your mortgage? Any type of refinance loan will include closing costs. These usually range between 2% and 5% of the new loan amount. Additionally, along with higher closing costs, cash-out refis usually charge higher interest rates. If you don’t want to refinance your existing home loan, a cash-out refinance may not be the right choice.
Ways to access home equity without refinancing:
- Home equity loan
- Home equity line of credit
- Reverse mortgage
Home equity loan
A home equity loan is commonly referred to as a second mortgage. A home equity loan is lent in a lump sum, and you repay the amount in flat monthly installments throughout the life of the loan. The monthly payments are fixed, meaning they don’t change over time.
Here are some quick facts about home equity loans:
- Fixed interest rate
- The borrowing amount depends on your income, credit history, and market value of your home
- You usually cannot borrow more than 80% of the equity in your home
- If you default, the bank may forclose on your house
Home equity line of credit (HELOC)
A home equity line of credit (usually shortened to HELOC) offers a good financial strategy for borrowers who want to keep their primary mortgages intact. A HELOC acts somewhat like a credit card, but it uses your home as collateral. The beauty of HELOCs is their flexibility. You may never need to use them, or you may use them only occasionally to pay for a home improvement before quickly repaying the balance. You could also max them out to cover an important cost. However, that flexibility comes at a cost; HELOC’s are adjustable-rate loans.
Here’s what a home equity line of credit is at a glance:
- A HELOC has a credit limit and specified borrowing period (usually 10 years)
- During the borrowing period, you only tap into your line of credit when you need it
- Most have variable interest rates
- You don’t have to pay off your home equity line in order to list your home for sale — once sold, creditors will be paid off from the proceeds of the sale.
Reverse mortgage
If you’re over the age of 62, you may be eligible for a reverse mortgage. A reverse mortgage is essentially a mortgage that works backward. So, instead of paying a monthly payment to a lender, the lender will pay you a monthly payment based on the value of your house. The entire loan balance, up to a limit, becomes due and payable when the borrower dies, moves out permanently, or sells the home.
Access home equity without refinancing: The bottom line
In summary, a house can be a great financial tool if you need cash. However, be aware that almost every option in which you are borrowing money will cost you fees and other payments. Be sure you can swing it before taking on a new loan or line of credit.
