The best ways to access home equity
Many Americans are concerned about the economy and struggling to manage issues like high inflation and interest rates. At the same time, many homeowners have enjoyed home price appreciation over the past few years. That can give homeowners significant amounts of home equity to tap into.
While borrowing against the value of your home can carry risk, it can also help when it comes to making ends meet, such as if you're struggling with credit card debt or want to fund new projects like home renovations that you don't have the cash for right now.
If you do want to access your home equity, you might have several options at your disposal. The best ways to access home equity can vary from person to person, as much depends on factors such as your current mortgage interest rate and how much money you want to borrow. You can easily explore your home equity borrowing options here now.
The best ways to access home equity
Some options that you can consider, each with pros and cons, include:
Home equity loans
A home equity loan is typically a lump-sum, fixed-rate loan that lets you borrow against some of the equity in your home. It's often called a second mortgage and it functions similarly to a first mortgage.
Home equity loans are "a great option for homeowners who need to access equity in a property and they do not want to interrupt the current first mortgage that is in place," says Eddie Martini, strategic financing and real estate investment advisor at Real Estate Bees, and wealth coach at Martini Legacy.
Home equity loans can be useful for funding home improvement projects, as well as debt consolidation, he adds, considering that home equity loans typically have much lower interest rates than credit cards do.
Explore your home equity loan options here to see if it's right for you.
HELOCs
Home equity lines of credit (HELOCs) sound similar to home equity loans, but instead of giving you a lump sum of money, HELOCs give you access to a credit limit secured against the home that you can draw from and replenish over time.
This form of financing typically has variable interest rates, and there's usually a draw period for several years, where you might only have to make interest payments, followed by a repayment period for interest plus principal.
"HELOCs are ideal for homeowners who do not need all of the cash out proceeds at one time," says Martini.
By drawing only what's needed, payments can also be lower, he adds. And like home equity loans, HELOCs can be appealing to those trying to consolidate debt, considering that interest rates tend to be much less than they are for credit cards.
Reverse mortgages
A reverse mortgage is another way to access your home equity if you're at least 62 years old. Unlike some other forms of home equity borrowing, reverse mortgages do not require repayments until you no longer live in your home or pass away, though interest and fees can accrue along the way.
"While these got a bad rap in the late 90s and early 2000s, they have changed what needed to change. A reverse mortgage can be an excellent option for qualified borrowers who need to access their home equity and may not have the income or life expectancy to qualify for a traditional first or second mortgage or even a HELOC," says Martini.
One potential downside is that a reverse mortgage can mean not being able to pass your home on to heirs, but some people still might be better off accessing their equity this way.
"Many people question this option as they feel that is the only piece of their retirement assets that they will be able to leave for their legacy. They should consider that if they are in a position where their home is their only financial tool available to pay for long-term care or any other essential needs during retirement, the only other option would be to go into personal debt and or sell the home," adds Martini.
Cash-out refinancing
Lastly, if you want to access your home equity while replacing your current mortgage, you might choose to do a cash-out refinance. This involves taking out a new mortgage that's larger than your existing one, giving you extra cash that you can use as needed.
Keep in mind, however, that it's not as if the extra cash is free.
"Be sure to consider the risks involved in taking on additional debt as cash-out refinancing allows you to replace your existing mortgage with a new one that has a higher balance," says Loren Howard, strategic financing advisor at Real Estate Bees and owner of Prime Plus Mortgages.
That said, cash-out refinancing rates tend to be lower than they are for other forms of home equity financing, but the total costs also depend on how these compare to your current mortgage interest rates. Cash-out refinancing is a "great option for anyone who can secure an interest rate at or below their current interest rate," adds Martini.
Explore your refinancing options here now to learn more.
The bottom line
As you can see, the best way to access your home equity depends on your current situation and what you're trying to achieve by borrowing against your home. These different options can come with different risks and opportunities, and the financing terms can vary among lenders. So, consider exploring these different options and speaking with different providers to see what works best for you.
