If you had a piggy bank growing up — whether it was actually pig-shaped or not — you probably remember the feeling of cracking it open and reaping the rewards of all your diligent saving. The feeling would emerge again after saving up a summer’s worth of cash from your lawn mowing or lemonade business, and once again when it came time to buy your first car with the proceeds from your lifeguarding gig. No matter the job, no matter the amount, and no matter the age, the feeling of realizing your months (or years) of saving is hard to replicate. However, many Americans are able to access that same feeling by cracking open the biggest personal finance “piggy bank” of all: their home equity.
Whether this home equity from a lender is applied toward a pool, a new roof, the expenses of everyday life, or fast-tracking your home loan’s repayment, accessing home equity can open doors to financial freedom possibilities that most Americans can only aspire to. With that said, this home equity loan option is not nearly as elusive as it seems — and there are a number of ways to access your home equity. Below, we’ll examine three ways to get usable equity out of your home (without refinancing) and why this equity can be the key to financial freedom.
Before we explore how to get equity out of your home without refinancing, let’s first explain what home equity is. Home equity is the difference between a home’s value and the amount owed on the home. From the moment a real estate buyer purchases a home and starts chipping away at their debt, they begin accruing equity in their home through their downpayment and monthly existing mortgage payments. Considering the average American monthly mortgage payment was $1,487 in 20191, this real estate equity can accumulate far more quickly than the occasional coin dropped into a piggy bank.
Given that home equity is calculated using the home’s value and not a straight debt-to-equity ratio, home value adds2 — which can be financed using home equity — can also help homeowners accrue equity. Therefore, home equity can be an incredibly useful tool for homeowners to harness. Accessing this equity, however, is not as simple as making a withdrawal from an account. Instead, homeowners apply this equity toward a new loan as collateral at much more favorable mortgage rates than a personal loan or credit card annual percentage rate (APR). One of the most common ways to get equity out of your home is through a home loan refinance, but this approach has its fair share of disadvantages and is far from the only option available to homeowners.
When the terms of a home loan are renegotiated, this process to reach these new terms is called refinancing.3 There are several circumstances where a homeowner might attempt to refinance, but this commonly occurs when there is a lower interest rate on a home than at the time the initial credit agreement was reached. Or when the borrower’s financial picture changes. Through a refinance loan, homeowners can lower their monthly payments, reduce their interest rate, or make strides to pay their home off quicker. They can also seek a larger home loan amount, cashing out on their home equity in the process.
This strategy is known as a cash-out refinance4, and the process allows borrowers to apply their home equity toward virtually any purchase they can imagine. A cash-out refinance also allows homeowners to borrow up to 80% of their home’s value, as the terms of this refinance loan mandate that the borrower must maintain at least 20% equity in the home. Though many homeowners will likely end up paying more in interest due to the new home loan’s increased size, a cash-out refinance can also lower the annual percentage rate — making this strategy a very compelling option for some homeowners in the event that they refinance at an opportune time.
Of course, refinancing is not for every homeowner — and this strategy is not without its disadvantages. One of a cash-out refinance’s biggest perks is also its greatest disadvantage, and just because you can use your equity to pay for grand Hawaiian vacations and a pair of jet skis doesn’t mean you should. If done correctly, a cash-out refinance can provide an opportunity for homeowners to expedite their home loan term repayment process and lower their annual percentage rate of interest. When used irresponsibly, it can stretch out your repayment period several decades while saddling you with a higher APR than you began with. Ultimately, refinancing only makes sense to homeowners in the event that they plan to use it wisely.
Biting off more debt than you can chew is a dangerous game that can lead to years of bad credit, and a cash-out refinance can put you at risk of losing your home to foreclosure in the event that you overextend yourself financially. A rule of thumb with a cash-out refinance is to know exactly what you plan to spend the loan amount on and know the exact amount down to the penny. Holding yourself accountable and putting your equity to work can save you a world of headache and financial insecurity down the road, and help make a cash-out refinance a more viable option. However, there are a number of ways to get equity out of your home without refinancing — which we will discuss below!
Now, it’s important to consider a cash-out refinance vs. a home equity loan. While a cash-out refinance may be the right tool for some homeowners, it’s not the only option out there. Borrowers may also find that a home equity line of credit (HELOC), home equity loan, or a sale leaseback agreement can provide them with the flexibility they need — but each option will provide its own set of unique benefits.
A home equity line of credit (or HELOC) is a tool that lets homeowners access portions of their home equity over a ten-year draw period to be used toward just about anything. This method of accessing home equity provides excellent flexibility and can be an ideal option for those who are between jobs or in need of quick cash — and don’t want to max out a credit card. During the draw period, borrowers are only required to make payments on their interest (which is usually at an adjustable rate,) and are only charged interest for the amounts they withdraw. Once a HELOC enters repayment, however, homeowners become responsible for their full monthly payment.
The difference between these phases can get homeowners into a bit of hot water, as the full payment can put a significant financial burden on borrowers. Additionally, the “revolving door” of credit, which is offered through a HELOC loan, enables some homeowners to take out more equity than they need — similar to a cash-out refinance — leading to an even larger monthly payment.
Requirements: Typically, you’ll need at least 15% equity in your home, over a 600 credit score, verifiable income dating back at least two years, and a debt-to-income ratio of 40% or less.
Opt for This Type of Second Mortgage If… A home equity line of credit is especially useful to those who need greater flexibility than some other second mortgage options, and expect to need incremental access to their home equity for years to come.
What is a home equity loan? Whereas a home equity line of credit allows borrowers to access available equity as needed, a home equity loan enables homeowners to access all of their equity via one lump sum. Home equity loans are often used for large home improvement projects like repairs or renovations and can be a valuable tool for homeowners looking to leverage their equity to increase their home’s value. These loans are not reserved solely for repairs and renovations, and are essentially as versatile as HELOCs — but while a home equity line of credit’s interest rate is variable, a home equity loan is fixed.
Considering a home equity loan is a second mortgage loan, this loan comes with closing costs which can be anywhere from 2-5% of the loan’s total amount.5 Given that the average American home loan is over $450,0006, these single-digit percentage points can amount to $9,000 to $22,000, respectively — eating up a decent chunk of that hard-earned home equity. Home equity loans also often carry a higher interest rate than a primary mortgage, which can accumulate over a 15-year loan repayment period.
Requirements: The requirements for a home equity loan are more rigid than that of a home equity line of credit, and homeowners will need to submit a credit report, have a credit score of 620 or higher, over 20% equity in their home, and two or more years of verifiable income to be considered. If you find yourself wondering how to build equity in a home, make sure to read up on the topic so you can make sure you have all the requirements available to apply for a home equity loan.
Opt for This Type of Second Mortgage If… Borrowers who will need access to the entirety of their available usable equity all at once will benefit the most from a home equity loan, and a home equity loan is a strong alternative to the high-interest rates affiliated with a credit card or HELOC. Because of the taller credit requirements, borrowers with good or exceptional credit history stand to get the most out of a home equity loan.
One of the best ways to get equity out of your home without refinancing is through what is known as a sale leaseback agreement. In a sale leaseback transaction, homeowners sell their home to another party in exchange for 100% of the equity they have accrued. Then, rather than moving, as would be the case in a traditional sale, homeowners rent the property back from the buyer at market value. While home equity loans, cash-out refinancing, and home equity lines of credit work best when homeowners plan to put their equity back into their homes, a residential leaseback agreement empowers homeowners to use their hard-earned equity to live life on their terms.
Some sale leaseback agreements can saddle homeowners with the burdens of ownership even after they have sold their home — leaving them to pay property taxes and cover maintenance for a property that is no longer theirs. Truehold, on the other hand, covers 100% of these costs (in addition to insurance and repairs), so our homeowners don’t have to.
Requirements: Given that a sale leaseback agreement is not a second mortgage like a home equity loan or home equity line of credit, homeowners are not barred from unlocking their equity by credit requirements. As far as equity is concerned, homeowners with more equity stand to benefit the most from a sale leaseback — but a sale leaseback agreement through Truehold allows homeowners to unlock 100% of their equity regardless of the amount.
Use This Tool If… Homeowners looking to turn their home equity into true financial freedom can benefit from a sale leaseback agreement through Truehold, and a sale leaseback agreement is an ideal option for homeowners looking to reap all of the benefits of homeownership without the responsibility of upkeep, insurance, or property taxes.
There are a number of ways to get equity out of your home from a lender without refinancing, and each strategy comes with its own unique set of benefits and disadvantages. Whether you’re looking for a revolving door of equity that a home equity line of credit provides, a lump sum to cover major expenses via a home equity loan, or the one-way ticket to financial freedom that comes with a sale leaseback agreement, you can do so while avoiding a refinance.
The method you use to unlock your home equity will come down to your situation and your goals, but the advisors at Truehold are here to answer your questions about how to make your home equity work for you with our sale leaseback program.
1. Bankrate. Average monthly mortgage payment. https://www.bankrate.com/mortgages/average-monthly-mortgage-payment/
2. Zillow. Best Home Improvements to Increase Value. https://www.zillow.com/sellers-guide/best-home-improvements-to-increase-value/
3. Investopedia. Refinance. https://www.investopedia.com/terms/r/refinance.asp
4. Bankrate. Cash-out mortgage refinance: How it works and when it’s the right option. https://www.bankrate.com/mortgages/cash-out-refinancing/
5. Bankrate. How much are home equity loan closing costs? https://www.bankrate.com/home-equity/home-equity-loan-closing-costs/
6. CNBC. The average size of a new mortgage just set a record, as home prices continue to climb. https://www.cnbc.com/2022/02/16/the-average-size-of-a-new-mortgage-just-set-a-record.html