Unlocking Your Home's Value: How to Sell Equity in Your House

Unlock the hidden value in your house. Learn how to sell equity and make the most of your property's worth. Read to discover more!

Financial Planning
September 13, 2023
Unlocking Your Home's Value: How to Sell Equity in Your House

Your home is your safe space: your haven after a long work day, and a site for cherished family memories. However, your home is also a valuable asset that, when effectively leveraged, can help you achieve your short- and long-term financial goals. Some homeowners looking to get the most out of their home may consider converting part of the property into a vacation rental or subletting a bedroom. While these can be effective methods of maximizing a home’s value, you might find that the best way to leverage the untapped value accrued in the property is by selling equity in your house. 

We’ll guide you through the process of unlocking your home value, helping you understand how to sell equity in your house and the different ways this equity can be accessed, to make informed financial decisions for your future. 

Understanding Home Equity: What You Need to Know 

Simply put, home equity is the difference between the current market value of your home and the outstanding balance on your mortgage. As you make monthly mortgage payments and your property appreciates, your home equity increases while your loan balance decreases. When it comes time to sell your home, your available equity will determine what portion of the sale proceeds you end up walking away with; if you own your home outright, that chunk of equity is maximized. 

But this home equity can also be a valuable financial resource that you can tap into through various methods. Some homeowners may see home equity as a means of eliminating high-interest credit card debt, choosing to free up equity with the sole purpose of doing so. This equity can also be the perfect way to finance costly home renovation projects, eliminating the need for a personal loan (or a completely drained savings account.)  

Before learning how to use home equity to build wealth or deciding to sell equity in your house–– or exploring other options –– it's essential to have a clear understanding of how to build equity in a home and your house's current value, the amount of equity you've accumulated, and how this equity might be used. This information will serve as the foundation of your equity release decisions.

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Exploring Different Methods to Sell Equity: Pros and Cons 

There’s no one-size-fits-all approach to selling your home equity, and each common method has pros and cons. Ultimately, your choice will depend on your financial goals and personal circumstances. 

Here are some benefits and limitations of some popular approaches to selling or accessing home equity. 

#1 Lifetime Mortgage

A lifetime mortgage is a type of equity release strategy that allows you to borrow against your home’s value while retaining ownership. Pros include the ability to access a lump sum or regular monthly payment to supplement your income. Interest accrues over time, meaning you won’t make regular payments (unless you choose to do so), and the loan is repaid when you pass away or move into long-term care.1 However, one con of this approach is that a lifetime mortgage could significantly reduce the inheritance you leave behind, with the final debt potentially exceeding the value of your property.

#2 Home Reversion

Home reversion is another common form of equity release, this time involving selling a portion or all of your home to a reversion company while retaining the right to live there. The pros include a lump sum payment without interest (or regular payments if you prefer,) and you can stay in your home rent-free for life –– as long as you continue to insure it. With that said, if you pursue a home reversion you'll no longer fully own your home, and its future value won't benefit you or your heirs unless you manage to ringfence a portion of your property.2 Given how complicated this process can be, it's essential to understand the terms, legal considerations, and potential impact on inheritance.

#3 Home Equity Loan 

While not a form of equity release, a home equity loan will allow you to access a lump sum based on the equity you've accrued –– functioning as a secured loan rather than a transfer of ownership. Some homeowners use their home equity loan to pay off debt. Pros include relatively lower interest rates compared to unsecured loans and the freedom to use the funds for a wide variety of purposes. Cons, on the other hand, include the obligation to make regular monthly payments with interest and the risk of losing your home to foreclosure should you default on your loan. 

#4 Home Equity Line of Credit (HELOC)

Similar to a home equity loan, a HELOC allows you to draw from your home’s equity without transferring ownership. In this case, equity comes in the form of a line of credit, which you can tap into as needed for the duration of your draw period. This can mean more flexible access to funds –– allowing you to borrow only what you need –– in addition to potential tax deductibility, and savings when compared to a personal loan and credit card. Furthermore, some homeowners might also find that using a HELOC to pay off a mortgage is a good option. With that said, fluctuating variable interest rates could lead to increased payments, and overuse (or misuse) might lead to significant debt accumulation if you’re not careful. 

#5 Cash-out Refinance

Unique from both equity release and equity loan options, a cash-out refinance simply replaces your existing mortgage with a new one of a higher amount, allowing you to receive the difference as a lump sum. The benefits of this approach arrive in the form of potentially lower interest rates than other forms of credit, and the simplicity of a single, larger mortgage rather than managing multiple mortgages or loans. Remember, however, that extending your mortgage term could result in higher overall interest costs, and mismanaging these funds can harm your long-term financial goals.

Preparing Your House for Equity Release: Tips and Recommendations 

Should you choose to go the route of equity release, you’ll need to properly prepare to guarantee the best possible outcome of this financial endeavor. Just as you would meticulously plan for any significant financial decision, covering all your bases is key when pursuing this option. 

Gather All Necessary Information

Before starting the equity release process, you’ll want to collect all relevant documentation related to your property and personal or shared finances. This may include property deeds, mortgage statements, and any records of improvements or renovations you've made to your home. These documents will help expedite the equity release process and provide a comprehensive view of your property's history.

Get Your Home Professionally Appraised

A crucial step in the equity release journey is obtaining a professional appraisal of your property. An accurate assessment of your home's current market value will serve as the foundation for calculating the equity you can potentially release –– and this appraisal will be vital when negotiating terms with lenders or buyers.

Consider Your Need-Based Benefits

For older homeowners, the equity release process risks potentially affecting any need-based benefits you currently receive, such as supplemental security income (SSI) or Medicare. Before you begin the equity release process, you must understand how releasing equity might impact your eligibility for these benefits. 

Consult an Expert 

Given the complexities involved in the equity release process, seeking advice from experts is highly recommended. Financial advisors, real estate professionals, and legal experts with experience in equity release can all provide valuable insights tailored to your unique situation –– ensuring you make the right choice that aligns with your short- and long-term financial goals. 

Like any financial decision, the key to a successful equity release journey is thorough preparation. By checking the above items off your pre-equity release to-do list, you'll be well-equipped to make the most of your home's value while safeguarding your financial future. 

Navigating the Legal Aspects of Equity Release 

So, is equity release a good idea? Because equity release involves both legal and financial complexities, it's essential to navigate them carefully. Consider these steps when shopping for any equity release or home equity loan product:

  • Seek Professional Advice: The first thing you’ll want to do is consult with financial advisors, legal experts, and real estate professionals who specialize in equity release. These experts can attain a thorough understanding of your situation, then develop the strategy that best suits your goals. 
  • Understand Contractual Terms: With the help of experts or without, be sure you thoroughly review and understand the terms of your chosen equity release method. Things like interest rates, repayment terms, penalties, and any potential impact on inheritance can dramatically alter your full financial picture and should be fully understood before signing. 
  • Double-Check Your Legal Documentation: When it comes to the sale of your home equity, there’s no such thing as being too careful. Take care to ensure that all legal documents are reviewed and signed correctly –– including contracts, agreements, and any other legal paperwork associated with the equity release process.

Making Informed Financial Decisions: Utilizing Equity Release Wisely

As mentioned above, equity release can be an invaluable tool for accomplishing short- and long-term financial goals –– when used wisely, that is. But without thoughtful decision-making and planning, equity release can present more risk than reward. Consider the below when embarking on the equity release process: 

  • Set Clear Goals: Before tapping into your home’s equity, take time to determine exactly why you're releasing equity in the first place. Whether it's to fund home improvements, supplement retirement income, or cover medical expenses, having clear objectives and an understanding of your goals will help guide your decisions.
  • Budget Carefully: If your chosen equity release strategy requires repayment during your lifetime, be sure to develop a budget that considers your new financial situation post-equity release. Factor in all new costs –– like interest or principal payments –– to ensure you’re fully prepared for the new financial responsibility. 
  • Consider Alternatives: Before committing to equity release, you may find it worthwhile to explore alternative options that may better meet your needs. Home equity loans and HELOCs can accomplish similar goals, as can a cash-out refinance, and you may find that the benefits of these options outweigh those of equity release. 

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Selling Equity in Your Home: Our Final Thoughts (and One Popular Alternative)

Unlocking your home's value through the equity release process can enable greater financial flexibility and support various goals. But despite these benefits, it's still a major financial decision that requires careful consideration of both the various methods available and their associated risks. Furthermore, every situation is different, and what may be an advantage to one homeowner may be a total pain to another. 

There’s also no short supply of other options out there. And if, at this point, you’re not entirely sold on equity release, you might find that Truehold’s sale-leaseback offers the benefits of equity release without any of its shortcomings. Through our sale-leaseback, you can sell your home to Truehold in exchange for your home equity, then continue living in your home as a renter for as long as you like. And while you enjoy your newly liberated home equity, we’ll take care of routine home maintenance and property insurance –– things that would otherwise be your responsibility should you pursue equity release. There are no interest rates to consider, nor repayment horizons to haunt you. With your cash in hand, you're ready to capitalize on home equity

So, is Truehold’s sale-leaseback right for you? Contact us today and start the conversation with one of our trusted advisors. 

Sources:

1. Money Helper. What is equity release?  https://www.moneyhelper.org.uk/en/homes/buying-a-home/what-is-equity-release 

2. Investopedia. What Is a Ring-Fence?  https://www.investopedia.com/terms/r/ringfence.asp 

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