How to Take Cash Out of Your Home
If the value of your home is greater than your mortgage amount then you have equity in your property. There are multiple ways to access the equity in your property, which is also known as taking cash out of your home. Below, we review how to take cash out of your home including the various alternatives for accessing your equity and outline the pros and cons for each option. Borrowers can refinance their existing mortgage with a cash-out refinance, add a smaller second mortgage such as a home equity loan or line of credit, obtain a reverse mortgage to eliminate their monthly payment or forego part of future property value gains in exchange for cash today with a shared appreciation program.
Each financing alternative has positive and negatives and involves different costs and benefits for borrowers. For example, borrowers pay the most closing costs with a cash-out refinance but are able to take more proceeds out of their home. A home equity loan or HELOC has lower closing costs but usually enables you to take out less cash. Unlike the other financing options presented below, a reverse mortgage does not require you to make a monthly mortgage payment but the loan balance increases over time, which is a unique risk for borrowers. So there are several issues to consider with each alternative.
The financing programs that is right for you depends on many factors including your property value, how much cash you want to take out, how long you plan on living in the property as well as your financial profile and objectives. Use the explanation and analysis below to determine the best option for you to take cash out of your home based on your personal and financial circumstances.
Cash-out Refinance
A cash-out refinance enables home owners to access the equity in their property by refinancing their existing mortgage. With a cash-out refinance, the new mortgage amount is greater than the borrower’s current mortgage balance with the borrower keeping the difference, less any closing costs. The amount of money the borrower receives after paying off the existing mortgage and closing costs equals the “cash-out” from the property.
Use our Cash Out Refinance Calculator to determine how much money you can take out of your home
Before pursuing a cash-out refinance borrowers should understand the approximate value of their property to determine if they have enough equity to pay off their existing mortgage and receive the proceeds they want by refinancing. Lenders typically permit a maximum LTV ratio of 60% - 80%, depending on the amount of money the borrower is taking out. The lower LTV limits typically apply when borrowers are taking a significant amount of cash out (greater than ~$250,000).
PROS
Ability to take more money out of property as compared to other financing alternatives
Potential to reduce current interest rate or change mortgage program by refinancing
CONS
Greater total interest expense for borrowers unless you reduce your interest rate or mortgage term by refinancing. A cash-out refinance typically costs borrowers more money over the long run than a home equity loan or line of credit
Higher closing costs
Contact the lenders below to learn more about the terms for a cash-out refinance
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Home Equity Loan
A home equity loan is a second mortgage taken out on a property that enables borrowers to access the equity in their property. Borrowers receive the proceeds from a home equity loan, less any closing costs, when the loan closes and funds. The home equity loan is subordinate, or junior, to the first mortgage on the property which means that in the event of a default the first mortgage is paid off first before the home equity loan.
A home equity loan is usually structured as a fixed rate loan, with the interest rate and required monthly payment remaining constant over the term of the loan. Lenders typically offer home equity loans with terms of 5 to 20 years, with 15 years being the most common length.
PROS
Access the specific amount of money you need without refinancing your entire mortgage
Lower total interest expense over the life of your existing mortgage and home equity loan as compared to a cash-out refinance
Lower closing costs than refinance
Fixed interest rate provides certainty for borrowers
CONS
Typically higher interest rate than the current market interest rate for a first mortgage or home equity line of credit
Inability to pay-down and take additional disbursements over time
The table below shows home equity loan rates for leading lenders near you
Home Equity Line of Credit (HELOC)
A home equity line of credit, also known as a HELOC, is similar to a home equity loan except that instead of borrowing a set amount of money when the loan closes, the borrower is able to borrow money from, or draw down, the line of credit as needed.
For example, a borrower may obtain a $25,000 HELOC but only borrow, or draw down, $5,000 from the line at closing, which gives the borrower $20,000 in remaining borrowing capacity. Additionally, the borrower can pay off and draw down the line of credit up to the maximum line amount, an unlimited number of times.
HELOCS are typically structured with draw period followed by a repayment period. The draw period is a set period of time during which the borrower can withdraw funds from the line. The draw period is typically ten years plus one month. The interest rate for the draw period is typically adjustable. During the repayment period the borrower can no longer draw down the line of credit and is required to pay off the outstanding loan balance. The repayment period is typically 10 - 20 years.
Just like a home equity loan, a HELOC is subordinate to the first mortgage on the property.
PROS
Ability to access a precise amount of equity in your property at any time over the life of the HELOC
Ability to take disbursements from, and repay, the line unlimited number of times Lower initial initial interest rate than a home equity loan
Lower initial initial interest rate than a home equity loan
Lower total interest expense as compared to a cash-out refinance
Lower closing costs than refinance
CONS
Limits on size of HELOC
Adjustable interest rate exposes borrower to increased interest rate and monthly payments
Use the FREEandCLEAR Lender Directory to search for lenders that offer HELOCs
Reverse Mortgage
The official term for a reverse mortgage is Home Equity Conversion Mortgage (HECM) but most lenders and borrowers use the term reverse mortgage. Similar to a regular, forward mortgage such as a cash-out refinance, a reverse mortgage allows you to access the equity in your home.
The biggest difference between a regular mortgage and a reverse mortgage is that the borrower does not make monthly payments with a reverse mortgage so the mortgage balance increases over time. The loan balance is paid off when you sell the property, refinance the reverse mortgage or pay-off the loan balance with other funds.
Reverse mortgages work best for borrowers that own their homes free and clear or have low mortgage balances. You are required to pay off any existing mortgage balance you have on the property with the proceeds from the reverse mortgage so the lower your existing mortgage balance, the more money you can take out from the reverse mortgage. To qualify for a reverse mortgage, one borrower must be at least 62 years old and the borrowers must demonstrate the ability to pay property taxes, homeowners insurance and other applicable monthly housing expenses.
Review our free, comprehensive Reverse Mortgage Guide
There are two types of reverse mortgages: fixed rate mortgage and adjustable rate mortgage (ARM). With a fixed rate reverse mortgage the borrower receives a one-time disbursement when the mortgage closes. With an adjustable rate reverse mortgage the borrower can elect to receive a one-time disbursement, monthly disbursements, access to a line of credit or a combination of a line of credit and monthly disbursements.
PROS
Eliminate your monthly mortgage payment
Loan does not need to be paid back until you sell or vacate the property
You continue to own the property
Access significant amount of property equity
CONS
The mortgage balance increases over time which can erode the equity in your property
You can potentially lose all the equity in your property
Instead of paying interest every month, it is added to your mortgage balance which means you pay interest on interest
Shared Appreciation Programs
Shared appreciation programs enable you to access the equity in your property in exchange for a portion of your property’s future appreciation in value. Shared appreciation programs are not technically structured as loans so there is no interest rate or monthly payment. Instead, borrowers repay the proceeds they received from the shared appreciation program by foregoing a portion of the increase in property value when they sell their home (or refinance).
There are different types of shared appreciation programs. Some programs purchase an option to acquire an equity stake in your property today (typically 5% - 10%) based on a set price and share in any future property appreciation based on a pre-determined percentage. For example, if a property is worth $500,000, you may receive $50,000 by selling an option to purchase a 10% stake in your home (at a fixed dollar amount) plus 15% of any future property appreciation. If you sold the property in 10 years for $600,000, you would owe the shared appreciation company $65,000 ($50,000 equity stake plus 15% of the $100,000 in property appreciation).
Other programs do not purchase an equity stake in your property but provide you with cash today in exchange for a portion of any future property appreciation. For example, for a $500,000 home you may receive $50,000 today in exchange for 50% of the increase in your property value when you sell. If you sold your house for $650,000 in 15 years, you would owe the shared appreciation company $75,000 (50% of the $150,000 in property appreciation).
The amount of proceeds you receive from a shared appreciation program depends on the value of your property, the percentage of your property you agree to sell (if applicable), the percentage of property appreciation you elect to share and your personal financial profile including your credit score. Additionally, most shared appreciation programs require the borrower to maintain 20% - 40% equity in the property after the transaction closes.
Although shared appreciation programs are marketed as an alternative to other types of home equity loans, they are legally structured as liens against your property which means they have a right to take possession of your property in the event of default.
PROS
No monthly payment
Some programs participate in losses if the property value declines
The loan does not need to be paid back until you sell or refinance the property
CONS
Lose upside if your property value increases because the appreciation is shared with the program partner
Potential penalty if you sell your home within a specified period of time (does not apply to all programs)
Typically higher implied interest rate than home equity loan or HELOC
Higher closing costs as compared to other home equity financing options
Access to a limited amount of equity in your property (5% - 20%)
Not available in all states
Sources
“What is a home equity loan?” CFPB. Consumer Financial Protection Bureau, September 25 2017. Web.
“My lender offered me a Home Equity Line of Credit (HELOC). What is a HELOC?” CFPB. Consumer Financial Protection Bureau, September 25 2017. Web.
“Are there different types of reverse mortgages?” CFPB. Consumer Financial Protection Bureau, August 30 2019. Web.