A home equity loan is a type of financing that uses your equity as collateral. The lender decides how much you can borrow based on the amount of equity you have in your home. Most lenders won’t lend you the full amount of your equity, as this increases their risk.
If you’re approved, the lender will create a second mortgage and cut you a check for the full loan amount. You can then use this lump sum how you wish and will repay it in equal installments with interest over time. This can be a good option if you know exactly how much you need to borrow.
There are a few ways you can access the equity in your home without selling it.
Cash-Out Refinance:
A cash-out refinance replaces your original mortgage with a new, larger one. The new loan pays off your old loan and covers your new closing costs. The remaining cash gets transferred to your bank account.
This option can make sense when you don’t like your existing mortgage—perhaps because the interest rate is too high or it’s an Federal Housing Administration (FHA) loan with permanent mortgage insurance premiums. If you can qualify for a cash-out refinance loan with a good rate, the closing costs might be worth it. If not, a home equity loan could be a better choice.
Home Co-Investing:
Home co-investing, also called equity sharing or shared appreciation, allows you to sell a portion of your interest in your home to an investor and receive cash that you can use however you want. That investor could be an individual, but more likely, it’ll be a company that either invests itself or connects you with investors. Examples include Unison, Point, Hometap, HomePace, EquiFi and Unlock.
Since it’s not a loan, you don’t have to pay the money back. When you sell your home, the investor gets its money back, adjusted up or down by a share of the change in your home’s value. Depending on the investor, you’ll typically have up to 10 years, 30 years or a lifetime to exit the agreement. Exiting means selling your home, refinancing it or tapping your savings to repay the investor based on your home’s value at that time.
Home Equity Line of Credit:
A home equity line of credit (HELOC) can be a good option for construction, home renovations or other expenses that you’ll pay over time. Similar to a credit card, a HELOC lets you borrow as much or as little of your available credit as you want; you don’t have to borrow a lump sum all at once. And HELOC closing costs can be minimal as long as you don’t close your line of credit within 36 months of opening it.
Many HELOCs also let you make interest-only payments during your first several years of borrowing, which is called the draw period. Once the draw period ends and the repayment period begins, which can be as long as 20 years, you’ll repay both the interest and principal. Unlike a home equity loan, the interest rate is variable, which means your monthly payments can change.
