What Are My Options For Taking Equity Out Of My Home?

Learn how taking equity out of a home through a Cash-Out Refinance, Home Equity Loan, and HELOC works and if any of these options fit your needs.

Your home’s equity, or the difference between the home’s value and the outstanding mortgage, can be a great way to access large sums of money when you’re strapped for cash.

Common tools for tapping into those funds include Cash-Out Refinance Loans, Home Equity Loans, and Home Equity Lines of Credit (HELOCs). Though they have similarities, each option has unique characteristics and requirements. Learn more about what each of these options has to offer and why homeowners choose to take equity out of their homes.

Why Take Equity Out Of Your Home?

People take equity out of their homes for many reasons often related to financial needs or opportunities. Here are some common reasons.

Home Improvements

You can use your home’s equity to invest in renovations or repairs to increase its value and improve your living space. Improvements like additions and upgrades enhance your home’s appeal while boosting its resale value, giving you a potential return on your investment when you sell.

Debt Consolidation

Credit cards and personal and student loans typically have high interest rates. Using a home’s equity for debt consolidation can help you save on interest, lower your monthly payments, and boost your credit score.

Major Life Expenses

One of the benefits of unlocking your home’s equity is that you can use the funds for various purposes. Whether you use your home’s equity for college tuition, to pay for a wedding, or to pay off medical bills, these loans are often a better option than a personal loan or credit card.

What Are My Options For Taking Equity Out Of My Home?

Cash-Out Refinance

Most lenders will allow you to borrow up to 80% of the home’s value less any liens. This is known as the Loan-to-Value Ratio (LTV). If your home is worth $300,000, for instance, the most you’d be able to borrow is $240,000. Let’s say you owe $150,000 on your mortgage, that leaves $90,000 available to borrow.

With a cash-out refinance, you receive a portion of your home’s equity in a lump sum and obtain a new loan with a larger principal balance than your current mortgage. The interest rate, term, payment, and conditions will likely change upon refinancing.

Benefits include being able to use funds for almost anything and not having to pay taxes on the proceeds. If you’re getting a better rate by refinancing, it can help offset the costs of obtaining the loan.

On that note, closing costs run about 2-5% of the total mortgage amount. For that reason, this loan is generally more favorable for mortgages with lower balances, mortgages with reduced interest rates, and a purpose that justifies the costs.

Home Equity Loan

With a home equity loan, you’ll receive your total loan amount upfront. In contrast to the previous option, a home equity loan doesn’t directly impact your current mortgage. Most often, a second mortgage is taken against an already mortgaged property.

Homeowners can typically borrow up to 80% of the LTV less any liens. Additionally, home equity loans offer a low fixed rate and a fixed repayment period, typically ranging from 5 to 15 years. This is great if you’re looking for predictable payments.

Other loan specifications will vary by lender. For example, they may impose a minimum loan amount and may or may not charge closing costs, which can run 2-5% of the total loan amount.

Home Equity Line of Credit (HELOC)

A HELOC also typically adds a second mortgage to the home and functions similar to a credit card, allowing you to borrow funds as needed during an initial draw period, generally 5 to 10 years.

Similar to a home equity loan, your lender may have specific requirements and may or may not charge closing costs, which also generally run 2-5% of the total loan amount. At A+FCU, for example, the max LTV is 80% (less any liens) and the minimum loan amount is $25,000 with a $4,000 minimum draw each time.

Like a credit card, you’ll only make payments if you draw funds and you don’t have to borrow the whole amount. During the draw period, you’ll typically make interest-only payments on the amount borrowed, but you can choose to pay more, repay the loan, or borrow more as you pay down the balance.

After the draw period ends, the loan will generally go into repayment for 15 to 20 years. Keep in mind that HELOCs traditionally offer a low variable rate, which means your payment can fluctuate over time.

Helpful Considerations

When you’re deciding whether to take equity out of your home, there are several factors to consider to ensure it’s the right financial move for you.

Loan-to-Value Ratio

A loan-to-value (LTV) ratio is a percentage that compares the amount of money borrowed to the amount of the asset being purchased. It represents the proportion of a property’s value financed by a loan. To find your LTV ratio, divide your loan amount against the appraised property value and multiply that by 100.

Knowing your LTV ratio can be helpful when you want to borrow against your home equity because it helps you determine how much you can borrow. Most lenders allow a maximum loan-to-value of 80 to 90 percent, meaning the total of your existing mortgage and the new loan cannot be more than 80 to 90 percent of your home’s current value. Your LTV ratio also affects the interest rate and terms of your loan.

Mortgage Balance

Your mortgage balance is the total amount of money you owe on your home loan. It will decrease over time as you pay the existing mortgage principal and interest. You can find your home equity amount by taking the home’s appraised value and subtracting the mortgage balance.

When you wish to borrow against your home equity for a HELOC, home equity loan, or cash-out refinance, your mortgage balance impacts how much you can access. Lenders will look at your mortgage balance alongside your credit and income.

Making A Decision

All of these loans can be used for virtually anything and each offers competitive rates and larger loan amounts that a personal loan or credit card can’t match. You may even qualify for a tax deduction, so it’s a good idea to consult with a tax professional as you prepare to implement a choice.

The bottom line is which – if any of these loans – is best for your situation depends on several factors, including how much equity you have, the amount of cash needed, your ideal repayment term, the purpose of the loan, and your budget.

Finally, each of these options places a lien on the home. Should you have trouble making payments, this might put your home at risk. Carefully consider your options before finalizing a decision.

A+FCU Can Help You Unlock Your Home’s Equity

At A+FCU, we understand that your home’s equity can be a valuable resource to leverage for your financial needs. Whether you’re considering a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC), we’re here to help you make the most of your options.

Membership required. LTV = Loan to Value. Programs, rates, terms, and conditions are subject to change without notice. Normal lending criteria apply. All loans subject to credit approval. Property must be located in Texas and primary owner-occupied single-family residence. $495 processing fee for loans less than $40,000. $795 processing fee for loans $40,000 and above. HELOC maximum loan amount of $250,000. NMLS #405608.