Alternative Ways to Access your Home Equity

Tapping into your home equity is a great way to access funds for immediate financial needs. While selling your home is one way to achieve this goal, there are many other solutions that allow you to take equity out of your home without having to move. Learn about these six alternative ways to get equity out of your home.

• Cash-Out Refinance
• Home Equity Line of Credit
• Home Equity Loan
• Home Sale Leaseback
• Reverse Mortgage
• Home Equity Sharing Agreement

Cash-Out Refinance

With cash-out refinancing, a homeowner replaces their current mortgage with a newer, larger loan. This refinancing strategy results in access to a lump sum of cash reflecting the difference between your new loan amount and the existing mortgage balance.

How Does a Cash-Out Refinance Work?

In the cash-out refinance process, you'll first need your property appraised for its current market value. Then, you'll submit an application for a new mortgage loan, which indicates the amount you want to borrow on top of your current balance. Upon approval, you'll receive a new mortgage balance that includes both of these amounts. Then, after paying off your existing mortgage with the funds received, you can apply the remainder towards immediate financial demands.

To receive approval for a cash-out refinance, you must typically have at least 20% equity in your home, a good credit score, and proof of reliable income. Similar to a home equity loan, a cash-out refi involves fixed monthly payments that begin immediately.

Pros of Cash-Out ReFi

Before choosing this option to unlock home equity, take into account the following cash-out refinance pros and cons.

• Upfront Cash: Cash-out refinancing offers you a lump sum of money that can be used for mortgage payments and other expenses in relatively no time.
• Lower Interest Rates: Mortgage interest rates are usually lower than other forms of borrowing. Plus, if current mortgage interest rates are lower than the rate you're paying for your existing mortgage, you could have smaller monthly payments.
• Tax Deductions: You may be eligible for tax deductions on the interest you pay on your cash-out refinance.
• Flexible Terms: Cash-out refis typically involve fixed, predictable repayments, while also offering flexible terms featuring longer repayment periods, variable interest rates, and more.

Cons of Cash-Out ReFi

• Increased Debt: With a higher loan amount and potentially higher monthly payments, you may see an increase in mortgage debt.
• Equity Reduction: Cash-out refinancing erases the amount of equity you've built in your home and limits your ability to access funds in the future.
• Closing Costs: Application costs, appraisal fees, and other closing costs add up when cash-out refinancing.
• Risk of Foreclosure: Failure to pay your new mortgage payments could put your home at risk of foreclosure.

Home Equity Line of Credit

A home equity line of credit, also known as a HELOC, is a borrowing option that allows you to access cash using your home equity as collateral.

How Does a Home Equity Line of Credit (HELOC) Work?

HELOCs function similarly to a traditional credit card, with your home acting as the credit line.

To begin the HELOC mortgage process, a lender will need to assess three factors: your current financial standing, the amount of home equity you have, and your home's current market value. After you're approved for a home equity line of credit and a credit limit is determined based on your home's equity, you can use the funds at any time for any amount (up to the limit).

In order to get approved for a HELOC, you must be at least 18 years old, have a stable stream of income and good credit score, and own around 15% to 20% equity in your home. Once your HELOC's funds are depleted, you'll enter the repayment period, which typically involves monthly payments on the principal and accrued interest.

Pros of Home Equity Line of Credit

As with other equity alternatives, there are several advantages and disadvantages of home equity lines of credit to consider before borrowing.

• Lower Interest Rates: You can usually expect to see lower interest rates on HELOCs compared to traditional home equity loans.
• Flexible Use: Borrowers can use HELOC funds for a wide variety of purposes and are given flexibility in how and when they can access cash.
• Long Draw Period: Should your home's value increase during the life of the HELOC, your equity and borrowing capacity may also grow, providing additional access to funds.
• Tax Benefits: If funds are used on relevant payments, such as home improvements, a HELOC's interest may be eligible for tax deductions.

Cons of Home Equity Line of Credit

• Variable Interest Rates: Over the course of a HELOC, there is a potential for interest rates to change and result in higher monthly payments.
• Temptation to Overspend: Entering a HELOC requires disciplined spending to accumulate less debt than you can afford to repay.
• Lower Home Equity: It's possible that you could owe more on your HELOC than what your home is worth if your home value decreases.
• Risk of Foreclosure: Since a HELOC uses your home as collateral, missing required payments puts your property at risk of foreclosure.

Home Equity Loan

Home equity loans, or second mortgages, are fixed-term loans that allow homeowners to borrow against their property's equity.

How Does a Home Equity Loan Work?

Acquiring a home equity loan requires a lender to assess your financial standing and the amount of home equity you have. If you're approved, you'll be given an upfront lump sum based on these factors, which can be used to cover important expenses.

Home equity loans vary from reverse mortgages, for example, which do not involve regular monthly payments. In a second mortgage, you must begin paying it back immediately. While home equity repayment periods differ by lender, this typically occurs over the course of five to 30 years. Meeting home equity loan requirements usually means having at least 15% to 20% equity in your home, a strong credit score, a stable source of income, and a low debt-to-income ratio.

Pros of Home Equity Loans

There are many pros and cons of home equity loans to be aware of, including:

• Access to Cash: A single lump sum payment is perfect if you're looking to pay off major expenses quickly.
• Stable Interest Rates: Home equity loans function at fixed rates and involve consistent monthly payments, regardless of market conditions.
• Extendable Repayment Period: It's possible for the loan's repayment period to be extended up to 30 years, making monthly payments more manageable.
• No Age Requirement: Most lenders do not have a minimum age requirement for home equity loan eligibility.

Cons of Home Equity Loans

• Decreased Home Equity: If the real estate market drops, your home value could drop, too, and leave you with a loan balance exceeding your property's value.
• Risk of Foreclosure: Because this loan is secured by your home, you could be at risk of losing your property if you fail to meet your monthly payments.
• Additional Costs: On top of adding a second monthly mortgage payment, home equity loans come with appraisal fees and closing costs.

Home Sale Leaseback

If you'd prefer to access home equity without refinancing or accruing debt, consider a home sale leaseback. This is a real estate transaction in which a homeowner sells their property and becomes a tenant, continuing to live in their home (or elsewhere) while paying rent for the house.

How Does a Home Sale Leaseback Work?

After finding a buyer, the home sale leaseback option works just like selling a home. In this sell and leaseback process, you'll define terms and transfer ownership to the buyer, who will then ask you to sign a lease agreement. Then, you can either begin living in your home as a tenant or lease the property out while living elsewhere, as long as you make regular rental payments to the buyer-turned-owner.

Pros of Home Sale Leaseback

Here are a few sale and leaseback advantages and disadvantages that can help you decide whether this option is right for you.

• Quick Access to Funds: Selling your property gives you immediate access to a lump sum that you can use toward other expenses as needed.
• Rental Perks: Selling and renting back your house can help eliminate/decrease any existing mortgage debt and allow you to remain unaffected by fluctuations in the real estate market.
• Negotiable Terms: Because buyers and sellers can negotiate terms independent of traditional lending institutions, leasebacks might be more flexible and help you avoid additional fees.
• Flexibility to Stay or Move: Entering a home sale leaseback gives you the flexibility to remain in your current home or relocate as you wish.

Cons of Home Sale Leaseback

• Loss of Ownership: Once you give up ownership of your home, you can no longer benefit from property appreciation, build home equity, or make property-related decisions.
• Total Loss of Equity: To reiterate, selling your home in this manner means that you lose all of your equity.
• Risk of Eviction: Failure to make lease payments or other violations to the contract could result in eviction.
• Rental Payments: Home sale leasebacks result in regular rental payments, which could increase based on market fluctuations depending on the terms.
• Tax Liabilities: You may be responsible for potential tax liabilities on the capital gains associated with the sale of your property.

Reverse Mortgage

Reverse mortgage loans are unique alternatives to home loans. They allow homeowners over the age of 62 to convert a portion of their home's equity into cash. Unlike traditional mortgages, where homeowners make monthly payments to a lender, reverse mortgages require lenders to make regular payments to the borrower.

How Does a Reverse Mortgage Work?

To get a reverse mortgage, you must first submit your application and home appraisal. Once you are approved, you'll be given an estimate determined by the amount of equity you've built in your home. Rather than making regular payments to the lender, these payments will be disbursed to you to use as you please. You (or your loved ones) must repay these funds when you sell your home or pass away. To be eligible for a reverse mortgage, you must be at least 62 years old and have a significant amount of home equity.

Pros of Reverse Mortgages

Below are the primary advantages and disadvantages of reverse mortgages.

• Increased Cash Flow: Payments from a reverse mortgage can help supplement your income or provide you with a financial safety net.
• Flexible Payment Options: Reverse mortgage funds can be distributed to you via a lump sum payment, line of credit, regular monthly payments, or a mix of these options.
• Continue Living in Your Home: One of the major benefits of a reverse mortgage is that you can continue to maintain ownership of (and live in) your home.
• Safe From Market Fluctuations: Reverse mortgages are considered non-recourse loans, meaning you won't be personally liable for any loan amount that exceeds your home's value.

Cons of Reverse Mortgages

• Additional Costs: Depending on the lender and terms, reverse mortgages can incur additional costs, including administrative fees, closing costs, monthly servicing fees, and more.
• Accumulating Interest: A reverse mortgage accumulates interest over time, which may decrease the amount of home equity you own and negatively impact your heirs until the loan is repaid.
• Impact on Government Benefits: Receiving a reverse mortgage may make you ineligible for government benefits, such as supplemental security income (SSI) and Medicaid.
• Risk of Foreclosure: Falling behind on maintenance fees, property taxes, or other homeowner payments could put you at risk of losing your home.

Home Equity Sharing Agreement

A Home Equity Sharing Agreement (HESA), Shared Equity Agreement, or Home Equity Investment, is a way for homeowners to access a portion of their home equity without taking on additional monthly payments or selling their property.

How Do Home Equity Sharing Agreements Work?

The process and terms will vary by provider, but generally a home equity sharing agreement works by homeowners first receiving a lump sum of cash in exchange for a percentage (typically between 15-50%) of the appreciation of their home in the future. Unlike a traditional loan, you don't have to make any monthly payments and simply pay when you sell your property or the agreement ends.

Pros of Home Equity Sharing Agreements

Below are the following pros and cons of a home equity sharing agreement.

• Access to Funds: You can get a large sum of money without taking on additional debt.
• No Monthly Payments: You don't have to worry about making monthly payments.
• Home Appreciation: You can share in the profits if your home value increases.
• Flexible Terms: Homeowners can choose the term of the agreement and the percentage of appreciation to share.

Cons of Home Equity Agreements

• Loss of Equity: You will be giving up a portion of the potential change in value of your home to the investment company.
• Not One-Size-Fits-All: Equity sharing agreements are unique, just like the homeowners they serve. As such, they are not the right fit for everyone. It’s important to make sure you understand the agreement and how it may impact you.
• Refinancing: Some mortgage lenders may decline to provide new loans to you because you have subordinate financing that shares in equity or home appreciation.

With Unison's equity sharing agreement, we convert up to 15% of your home's value to cash, so you can put those funds to work for you and continue to own your home.