How to Get Equity Out of Your Home Without Refinancing

You can cash out home equity without a refinance

If you need a large sum of money and you’re wondering how to get equity out of your home without refinancing, there are a few alternatives worth considering.

You can tap your equity through a variety of methods, including home equity loans, home equity lines of credit, and home equity investments, to name a few. Although a cash-out refinance may tempt you, it’s not the only way to use your home equity.

Here’s what you should know about pulling equity from your home without refinancing.

In this article (Skip to...)

• Equity without refinance
• Options
• Pros and cons
• Should you refinance?
• FAQ

What is home equity?

Simply put, home equity represents the portion of your home that you truly “own.” Your home equity is calculated as the difference between the current appraised value of your property and the remaining balance on your mortgage.

• For example, imagine you purchased a home valued at $300,000. You made a down payment of $60,000 and financed the rest. At this point, your initial home equity is $60,000—the amount you paid upfront.

Over time, as you continue making mortgage payments, this equity increases. Each payment reduces the mortgage balance, thereby increasing your ownership stake in the property.

Additionally, your home’s equity can grow as its market value appreciates. This could happen due to general real estate market trends or through improvements and renovations you make to the property.

• For instance, if, after a few years, the market value of your home rises to $350,000 and your mortgage balance is down to $220,000, your home equity would be $130,000 ($350,000 market value minus $220,000 mortgage balance).

Understanding and building home equity is vital, as it can provide financial flexibility, allowing you to secure loans such as home equity lines of credit (HELOCs) or home equity loans, which can be used for various purposes like home improvements, consolidating debt, or financing major expenses such as medical bills or education.

Can you pull equity out of your home without refinancing?

Absolutely. You can tap into your home’s equity without refinancing your existing mortgage.

Home equity loans and Home Equity Lines of Credit (HELOCs) are popular choices that let you borrow against your home’s equity while keeping your original mortgage intact.

• A home equity loan, often called a “second mortgage,” allows you to borrow against the equity you’ve built in your property, providing you with a lump sum of cash to use as you see fit.
• HELOCs, on the other hand, function similarly to a credit card, where you can borrow money as needed up to a certain limit. Both options typically have lower interest rates compared to other types of loans because they are secured by your home’s value.

Home equity options other than refinancing include reverse mortgages, sale-leaseback agreements, and home equity investments. Remember, each choice has its own merits and potential drawbacks, so it’s crucial to thoroughly evaluate and make an informed decision to suit your financial needs and goals.

How to get equity out of your home without refinancing

If you already have a low, fixed-rate mortgage or if you’re well on the way to paying off your current mortgage, a cash-out refi might not make sense. Instead, you can consider a home equity line of credit (HELOC) or a home equity loan. These “second mortgages” let you cash-out your home’s value without refinancing your existing loan.

But there are a few other lesser-known ways to tap home equity without refinancing. Here is what you should know.

1. Home equity line of credit (HELOC)

A home equity line of credit, or HELOC, is a smart financing strategy for those who don’t want to refinance their primary mortgage. It operates similarly to a credit card but uses your home’s value as security, which enables lower interest rates.

With a HELOC, you can draw funds as needed, repay them, and then draw again during the draw period, which can last up to 10 years. It’s important to continue making your original monthly mortgage payments while managing the HELOC’s interest-only payments on the drawn amount.

Key HELOC benefits:

• Borrowing flexibility: Withdraw and repay funds as needed within the draw period.
• Lower interest rates: Secured by home equity, they offer more favorable rates.
• Interest-only payments: Pay interest only on the amount borrowed during the draw period (not the full credit limit).
• Interest deductibility: Interest paid on the loan may be tax-deductible if used for home improvements.
• Lower costs: Typically, less expensive than cash-out refinancing, with lower closing costs and quicker processing.
• No usage restrictions: Use the funds for any purpose, from home improvements to education.
• Efficiency: Faster to set up compared to alternatives, providing quick access to funds.

A HELOC is especially useful for those not needing a large sum upfront, offering a blend of cost efficiency, flexibility, and lower interest rates.

2. Home equity loan

For homeowners who want to borrow against the equity in their homes without refinancing their current mortgages, a home equity loan is an enticing choice. This type of loan grants you a lump sum upfront, based on the equity you’ve built in your home, which you then pay back over time with fixed monthly payments.

Unlike a HELOC, a home equity loan provides the security of a fixed interest rate, making it an ideal choice for those who prefer consistent monthly repayments throughout the life of the loan. It’s an effective way to finance large, one-time expenses such as home renovations, consolidating debt, or funding major life events.

Key home equity loan benefits:

• Fixed interest rates: Offers stability and predictability in repayments, unlike variable-rate lines of credit.
• Lump sum funding: Receive the full loan amount upfront, which is suitable for expensive projects or purchases.
• Interest deductibility: Interest paid on the loan may be tax-deductible if used for home improvements.
• Lower costs: Typically, less expensive than cash-out refinancing, with lower closing costs and quicker processing.
• No usage restrictions: Use the funds for any purpose, from home repairs to putting a down payment on a vacation home.

For homeowners who need a larger loan amount quickly, a home equity loan is a popular option.

3. Home equity investments

Home equity investments, also known as home equity agreements (HEAs), offer a unique method for homeowners to tap into their home’s value without accruing additional debt. Through this arrangement, an investor buys a share of the home’s equity, valuing the percentage based on the property’s current market price. The duration of these agreements typically spans from 10 to 30 years, providing a long-term strategy for equity access.

Key aspects of home equity investments:

• Debt-free financing: Access your home’s equity without the burden of monthly debt payments.
• Flexible terms: Agreements last between 10 and 30 years, with various exit options like selling or refinancing.
• No monthly or interest payments: This eliminates the stress of monthly payments, though a service fee may be involved.
• Eligibility based on equity: Requires a significant amount of equity, typically allowing for a loan-to-value ratio of 75% to 85%.

Home equity investments are well suited for borrowers who are unable to handle extra monthly payments or those with low credit scores.

4. Sale-lease agreements

A sale-leaseback agreement provides an alternative route to access home equity without refinancing. This arrangement involves selling your home to another entity, allowing you to cash out 100% of your accrued equity, and then leasing your home back from the new owner.

Sale-leaseback agreements let you continue living in your home, paying rent at market value, unlike traditional home sales, which would require you to move out. What’s more, these types of agreements often bypass the credit requirements typical of second mortgages or home equity lines of credit.

Sale-lease drawbacks:

• Ongoing financial obligations: Some agreements might require you to cover costs typically associated with homeownership, such as property taxes and maintenance. However, there are options where the buyer assumes these responsibilities, including insurance and repair costs.
• Loss of property ownership: Entering a sale-leaseback means you’ll no longer own your home, missing out on potential future value increases.
• Monthly rent payments: Although you can unlock a significant amount of equity, the deal converts you into a renter of your own home, which might not be financially advantageous over time for some.

Ultimately, sale-leaseback agreements might not be the most advantageous route unless you find yourself in a situation where immediate liquidity is essential, and your home is your primary or sole asset.

5. Rate-and-term loan with a second mortgage

Looking for a smart way to access your home’s equity without paying for a cash-out refinance loan? Consider this two-step strategy that offers both better mortgage terms and access to equity, minus the high costs of cash-out refinancing.

1. Refinance your first mortgage with a cheaper rate-and-term refinance loan.
2. Then, get a second mortgage (HELOC or home equity loan) to tap into your equity.

This strategy effectively sidesteps the high cost typically associated with cash-out refinancing. It’s particularly well-suited for individuals who have accumulated a significant amount of equity in their homes and are seeking to lower their monthly payments while simultaneously accessing funds for substantial expenditures.

If you have an FHA, USDA, or VA loan, you may be able to save even more with a Streamline Refinance Loan—a loan that lowers your rate or monthly payment without checking your credit score or appraising your home.

If you have a conventional loan and can’t get a Streamline Refinance, you may still save with this strategy since rate-and-term refinancing is generally cheaper than cash-out refinancing.

6. Reverse mortgages

A reverse mortgage is a specialized type of home equity loan designed for seniors 62 years of age or older. It allows the conversion of a portion of home equity into cash without the need for refinancing.

Furthermore, a reverse mortgage allows borrowers to tap into their home equity without taking on any monthly payments whatsoever. Instead, the lender makes monthly payments to the homeowner. The obligation to repay the loan is deferred until the homeowner either sells the home, moves out, or passes away, at which point the loan must be settled.

Reverse mortgage disadvantages

• Costs: Fees and interest can be high, leading to an increasing loan balance over time.
• Potential for equity consumption: The growing loan balance may significantly reduce the home’s equity, which impacts the inheritance for heirs.
• Foreclosure risk: Failure to comply with loan terms, such as home maintenance and paying taxes and insurance, could result in foreclosure.
• Loan limits: The homeowner’s age, home value, and current interest rates all have an impact on the amount that is available for borrowing, which potentially restricts access to the full equity value.

Due to its high costs and potential to deplete home equity, consider a reverse mortgage only as a last resort for cash in retirement. It’s most appropriate for those without alternative financial resources, as it can substantially affect your financial legacy and reduce inheritance for heirs.

7. Personal loans

When considering how to get equity out of your home without refinancing, one option is securing a personal loan with your home’s deed as collateral. With this method, you may get the benefits of secured borrowing without the costs of cash-out refinancing. It’s an intermediary option that offers fixed rates and the flexibility to use funds for whatever purpose you like.

The interest rates may be lower than those on unsecured credit card debt, but they are usually higher than those on traditional home equity loans.

For people with good credit who want quick access to funds without going through the refinancing process, personal loans may be a decent option, though they’re not perfect for everyone.

Pros and cons of refinancing

When considering options to tap into the value of your home, it’s essential to understand the potential benefits and drawbacks of refinancing. Let’s break them down:

Pros of refinancing:

• Lower interest rates: If you secure a refinance loan with a lower interest rate than your original mortgage, you can save money over the life of the loan
• Fixed interest rate: Refinancing can allow you to switch from a variable interest rate to a fixed interest rate, providing more predictable monthly payments
• Longer loan terms: Refinancing can extend your loan terms, reducing your monthly payment burden
• Cash out: If your home has appreciated in value, you can do a cash-out refinance to use home equity and get a lump sum payment

Cons of refinancing:

• Closing costs: Refinancing a mortgage involves costs similar to those you paid for your original mortgage
• Longer repayment: Extending your loan terms means you’ll be in debt for a longer period
• Foreclosure risk: If for any reason you cannot meet the new mortgage payments, you risk foreclosure on your home

What to consider before a cash-out refinance

A cash-out refi is a powerful tool. It may be exactly what you need to build a stronger financial foundation going forward. If so, the closing costs and higher interest rate will be worth the cost.

But before applying for this type of mortgage refinance option, make sure you understand the details. Here are a few key points to be aware of.

1. How much cash can you withdraw?

Fannie Mae and Freddie Mac set the rules for conventional loans. And they limit the amount of cash you can withdraw from your home equity.

Cash-out refinancing has a loan-to-value limit of 80%. This means you’d need to leave 20% of your home’s current value untouched. If your home was worth $300,000, your new loan amount couldn’t exceed $240,000.

This new $240,000 loan would need to pay off your existing loan. Then, your cash-out would come from what’s left over. If you owed $230,000 on your existing mortgage loan, you could get only $10,000 in cash back.

Many homeowners don’t have enough equity to pay off their current loan, leave 20% of equity in the home, and get cash back.

There is one exception to this convention. The VA cash-out refinance can allow borrowers to access 100% of their home’s equity, bypassing the 80% LTV rule. Only veterans, active duty service members, and some surviving military spouses can get VA loans.

2. Do you meet cash-out underwriting guidelines?

A cash-out refinance is not a source of quick cash; it’s a large loan secured by your home. As a result, underwriting and eligibility guidelines are stricter for these loans and they can take longer to close than shorter-term financing.

Conventional loan lenders look for higher credit scores with cash-out refinancing: Home buyers can get approved with FICO scores as low as 620. For cash-out refinancing, lenders often want to see credit scores of at least 660.

It is worth noting that you can avoid the surcharges and stricter underwriting by choosing government-backed refinance options like FHA and VA.

However, those programs have their own sets of upfront mortgage insurance fees. FHA also charges annual mortgage insurance on all cash-out refinance loans, whereas a conventional cash-out loan has no PMI. So these may not make sense if you have significant home equity.

3. Are you comfortable changing your loan amount and term?

Cash-out refinancing means you’ll have a bigger mortgage and probably a higher payment. You’ll also burn up some home equity, which is an asset just like your 401(k) or bank balance.

This is not something to do lightly.

In addition, taking a cash-out refinance means resetting the clock on your home loan. You pay more over time by adding those extra years and interest to a new mortgage.

4. How will you manage your finances after cashing out?

If the reason for your cash-out refinance is debt consolidation, consider other options before you take out this type of refinance loan.

This is especially true if you’re consolidating consumer debt. Depleting home equity to pay off debt accrued by buying things that don’t outlast the debt can be risky.

In addition, it can be tempting for some borrowers to run up their cards again and accrue new debt after paying off the old liens. Then they might need another cash-out refi to pay off the new debt, creating a vicious cycle.

That doesn’t mean a debt-consolidation refinance is always a bad idea. It just means you need to have a careful plan in place before doing so.

Talk to a financial advisor about how you plan to pay off your debts and have a clear roadmap in place for better money management after the debt consolidation is complete.

FAQ: How to get equity out of your home without refinancing

Final thoughts on getting equity out of your home without refinancing

If you’re aiming to consolidate debt, upgrade your house, or increase your financial flexibility, using your home equity can be an effective strategy.

Start by determining your home’s current value and calculate your loan-to-value ratio to evaluate eligibility for a home equity loan or a HELOC.

The key is to use this equity that improves your financial situation, such as paying off high-interest debts or investing in value-boosting home improvements. It’s important to have a repayment plan in place.

Lastly, compare different lenders to find the best option for your needs. You can begin that process by clicking on the links below.