How to Take Equity Out of Your Home Without Refinancing

One of the biggest benefits to becoming a homeowner is the ability to build equity. And as home prices have soared in the past couple of years, many people are taking advantage of the wealth obtained because of their home’s increased value. Your home’s equity can provide you with the funds for renovations, upgrades, debt consolidation, and more! However, what if you do not want to refinance your current mortgage in order to access it?

The good news is there are strategies that homeowners can utilize to tap into their equity without needing to refinance. In this article, we will detail alternative solutions to refinancing and as well as how you can take full advantage of the equity in your home.

What is home equity?

In simple terms, a home’s equity is the amount of your house that you actually own. Like most homeowners, you probably took out a mortgage to pay for the purchase. Your equity is calculated based on the amount of your home loan that you have paid off versus what you are still paying back. Here is the simple formula you can use to determine how much equity you may have access to:

Home Equity = Current Market Value – Mortgage Balance

You can also use online tools or talk to a real estate agent to gain a better understanding of your home’s worth. Once you begin the process of tapping into it, your lender will be able to provide you with a conclusive equity amount after confirmation of the home’s value from an appraisal.

Why would you want to avoid refinancing?

There are a number of reasons borrowers may want to avoid completely refinancing their mortgage just to access equity. In most cases, homeowners who refinance are not happy with their home loan’s current terms or interest rate. Sometimes, refinancing can help you pay off your loan faster, spend less money over the life of the mortgage, and help you access your home’s equity.

However, refinancing is not for everyone. If you are happy with your current interest and payments, that may deter you from considering a complete refinance (especially if current rates are higher than when you initially took out your mortgage). And depending on how long you have been paying off your current mortgage, it can be disheartening to hit the reset button and start over with new loan terms.

Luckily, there are options for homeowners who do not want to refinance, but need the funds that their home’s equity can provide.

How to take advantage of your home’s equity (without refinancing)

It does take time to build equity, but the good news is that once you have, there are a few options homeowners can choose from to access their equity without refinancing. These include:

• A home equity line of credit (HELOC)
• A home equity loan

Now that you know you will have non-refinancing options to access your home’s equity, let us take an in-depth look at their differences and benefits so you can better determine which is right for you.

What are the different types of home equity loans?

Even though they sound similar, there are significant differences and varying benefits between a HELOC and a home equity loan. Here is a quick breakdown:

HELOC	Home Equity Loan
A line of credit from which borrowers can draw funds as needed, up to a certain limit (typically based on a percentage of available equity).	Also referred to as a second mortgage, allowing borrowers to borrow against a home’s equity, providing a lump sum of cash.
Starts in a draw period (normally 10 years) in which you will make interest-only minimum payments, that is then followed by a repayment period (lasting up to 20 years) that requires you to start paying back principal and interest.	Repayment period options up to 30 years. Minimum payments will include both interest and principal immediately.
Most HELOCs have variable rates, however some lenders do provide fixed-rate options.	Typically, only has fixed-rate options.

It is important to note, that despite their differences, both HELOCs and home equity loans have borrowing limits between 80% to 85% of the home’s equity. However, some lenders may allow for more, so be sure to ask yours what they are able to provide. 

HELOC pros and cons

HELOCs are a great tool for homeowners who need funds, but you need to know the advantages and disadvantages they provide before deciding if it is the right option for you.

Here are some of the pros of a HELOC:

• Quick access to the cash you need

• No restrictions for how to use your funds

• Use as much or as little cash as you need (similar to a credit card)

• Interest is tax deductible if you use your HELOC for home improvements

When it comes to mortgages and funding options, though, it is important that you are also aware of potential downsides.

Here are some of the cons of a HELOC that you need to know:

• Variable interest rate may increase depending on the market

• Monthly payments may fluctuate, making it difficult to budget

• Temptation to overuse your line of credit for unintended purposes

• Your home is used as collateral

Many borrowers favor HELOCs for their convenience and flexibility. You access the funds only as you need them and pay only for what you borrowed. It is a great solution if you have one or more ongoing projects and do not know the total costs up front.

Home equity loan pros and cons

Another popular choice amongst homeowners, home equity loans are a great option for borrowers who know the amount they need and desire more consistent payments with a fixed rate. However, they also have some drawbacks to be aware of.

Here are some of the pros of a home equity loan:

• Up-front lump sum of cash at closing
• Fixed-interest rate and monthly payments for simpler budgeting
• Does not impact the terms of your first mortgage
• Shorter term options for those who want to spend less on interest

That said, here are some of the cons every borrower should know about home equity loans:

• Higher interest rates compared to HELOCs and cash-out refinances
• Required to pay interest on total loan amount, whether you use it all or not
• Adds a second mortgage to manage and include in your budget
• Shorter terms may mean higher monthly payments

How to use your home’s equity

Now that you have a better understanding of your different options for accessing your home's equity, the next step is deciding how best to take advantage of it! There are a number of ways you can use it, and the best part is, that regardless of whether you choose a HELOC or home equity loan, you can use your funds however you want.

Here are some smart options for utilizing your home equity:

• Tackle home improvement projects

• Consolidate other debts

• Pay off your student loans or a child’s college tuition

• Make retirement plan adjustments

• Cover outstanding or unexpected medical expenses

• Use as a down payment on investment property

• Add an addition to your home

At the end of the day, the best option looks different for everyone. Before committing to either a HELOC or a home equity loan, it is always best to consult with your lender to determine what will make the most sense for you.