A home equity loan is a type of financing that uses your equity as collateral. The lender decides how much you can borrow based on the amount of equity you have in your home. Most lenders won’t lend you the full amount of your equity, as this increases their risk.
The lender will establish a second mortgage and provide you a cheque for the whole loan amount if you are accepted. After that, you are free to spend this lump sum anyway you choose. You will pay it back over time in equal payments with interest. If you are certain of the precise amount you need to borrow, this can be a smart choice.
You may obtain your home’s equity in a few different methods without having to sell it.
Cash-Out Refinance:
A cash-out refinance replaces your original mortgage with a new, larger one. The new loan pays off your old loan and covers your new closing costs. The remaining cash gets transferred to your bank account.
This option can make sense when you don’t like your existing mortgage—perhaps because the interest rate is too high or it’s an Federal Housing Administration (FHA) loan with permanent mortgage insurance premiums. If you can qualify for a cash-out refinance loan with a good rate, the closing costs might be worth it. If not, a home equity loan could be a better choice.
Home Co-Investing:
Home co-investing, also called equity sharing or shared appreciation, allows you to sell a portion of your interest in your home to an investor and receive cash that you can use however you want. That investor could be an individual, but more likely, it’ll be a company that either invests itself or connects you with investors. Examples include Unison, Point, Hometap, HomePace, EquiFi and Unlock.
Since it’s not a loan, you don’t have to pay the money back. When you sell your home, the investor gets its money back, adjusted up or down by a share of the change in your home’s value. Depending on the investor, you’ll typically have up to 10 years, 30 years or a lifetime to exit the agreement. Exiting means selling your home, refinancing it or tapping your savings to repay the investor based on your home’s value at that time.
Home Equity Line of Credit:
A home equity line of credit (HELOC) can be a good option for construction, home renovations or other expenses that you’ll pay over time. Similar to a credit card, a HELOC lets you borrow as much or as little of your available credit as you want; you don’t have to borrow a lump sum all at once. And HELOC closing costs can be minimal as long as you don’t close your line of credit within 36 months of opening it.
Throughout the “draw period,” which is the first few years of borrowing, many HELOCs allow you to make interest-only payments. You’ll repay both the principle and interest when the draw period finishes and the repayment term, which can last up to 20 years, starts. Your monthly payments may fluctuate since the interest rate is variable, in contrast to a home equity loan.
