What is the Best Way to Get Money Out of Your House?

Your home is likely one of your most valuable assets. The equity you’ve built up in your house over time can be a useful source of funds if you need cash for a major expense. However, tapping into your home equity should not be done lightly. You’ll want to consider the pros, cons costs, and risks associated with the various options to determine the best approach for your situation. Here’s an overview of some common ways to get money out of your house and key factors to weigh when making this important financial decision.

Evaluate Your Home Equity

Before exploring specific ways to access home equity, the first step is to understand how much equity you have available. Your home equity is calculated by subtracting the amount you still owe on your mortgage from your home’s current market value.

For example, if your home is worth $300,000 and you owe $180,000 on your mortgage, you have $120,000 in equity ($300,000 – $180,000 = $120,000). This equity has built up over time through your down payment, mortgage principal payments, and home appreciation.

Knowing your equity amount will give you an idea of how much cash you can potentially tap for other uses, Most lenders allow you to borrow up to 80-85% of your total equity,

Cash-Out Refinance

One of the most common ways to tap equity is through a cash-out refinance. This involves taking out a new mortgage loan for more than what you currently owe and using the extra funds for other purposes.

Pros:

• Access to large lump sums if you have significant equity
• May lower mortgage rate compared to original loan
• Fixed rates provide stability in payments

Cons:

• Costs similar to taking out a new mortgage (2-5% of loan amount)
• Loan repayment term resets, increasing total interest paid
• Higher rates than original mortgage
• Risks if new payments unaffordable

A cash-out refinance makes sense if your goal is to fund a major project and you can get a lower rate than your current mortgage. But carefully consider the costs.

Home Equity Loan

Another option is a home equity loan, sometimes called a second mortgage. You keep your existing mortgage and take out a separate loan against your equity.

Pros:

• Access lump sums without refinancing original mortgage
• May offer better rates than unsecured loans

Cons:

• Closing costs to open loan
• Monthly payment burdens
• Fixed rates mean no flexibility
• Risks if payments unaffordable

Home equity loans work well for one-time large expenses. But compare costs to alternatives like home equity lines of credit.

Home Equity Line of Credit (HELOC)

HELOCs operate like credit cards, allowing you to access equity as needed up to a set limit during a draw period.

Pros:

• Flexibility to access funds as needed
• Only pay interest on what you use
• Interest may be tax deductible

Cons:

• Pay closing costs to open
• Variable rates could rise over time
• Risks losing access if home value drops
• Must make minimum payments

HELOCs provide flexible access to equity but require discipline to manage payments. Make sure you understand the terms before getting one.

Reverse Mortgage

Reverse mortgages allow seniors 62+ to convert home equity into cash or monthly payments from a lender. Repayment is deferred until the homeowner moves, sells, or dies.

Pros:

• Access equity without monthly payments
• No credit requirements

Cons:

• Very high fees and interest costs
• Loan balance grows over time, reducing equity
• Risk of foreclosure if terms violated
• Heirs may inherit less equity

Reverse mortgages can provide cash in retirement but drain equity over time. Weigh options carefully before committing.

Personal Loans

Borrowers can sometimes use their home’s deed as collateral for a personal loan to access equity. Rates may be lower than unsecured debt but higher than home equity loans.

Pros:

• Avoid mortgage refinance process
• Flexible use of funds

Cons:

• Higher rates than traditional home equity loans
• Risk of losing home if default

Personal loans are quick but not the cheapest way to tap equity. Make sure you can manage the payments before committing.

Key Factors to Consider

• Home value vs. loan amount – Know how much equity you have available to borrow against. Most lenders require at least 15-20% equity remaining.

• Costs – All options have fees but refinancing and reverse mortgages tend to be most expensive. Compare total costs.

• Risks – Taking equity converts an asset to debt. Manage payments carefully to avoid foreclosure risks.

• Rate/term flexibility – Know whether rates are fixed or variable. Factor in if you need payment flexibility.

• Monthly payments – Make sure new loan payments fit comfortably in your budget. Don’t overextend.

• Credit score – Most options require good credit. Reverse mortgages are an exception.

• How you’ll use funds – Ideally tap equity for investments that may appreciate, not depreciating assets.

The Bottom Line

Tapping home equity can provide access to funds for major financial goals. But there are always costs, risks, and tradeoffs involved. Conduct thorough research, run the numbers, and explore alternatives before choosing the best approach for your situation. Move forward cautiously and strategically to avoid putting your financial stability in jeopardy.

Yes, homeowners can access their home equity without refinancing their primary mortgage. Several options exist, including home equity loans, home equity lines of credit (HELOCs), and even sale-leaseback agreements.