Buying a home is an investment, and equity is an indicator of financial stability. However, the hefty cost of refinancing often makes it difficult for people to choose it as an option. Borrowers now have the ability to get cash out without refinancing with programs such as home equity loans and lines of credit.
You can access your house equity through various methods, including home equity loans, HELOC lines of credit, and home equity investments. While a cash out refinance loan might be alluring, it is not the only option for maximizing the equity in your home.
According to a report, refinancing costs almost 2% to 6% of the loan amount. Therefore, while it is a common method to acquire home equity, refinancing is also an expensive and extensive process. Homeowners have a significant advantage financially to get cash out of their property with home equity loans, HELOCs and 2nd mortgages and your don’t even have to refinance your existing mortgage.
Learn How to Get Home Equity Without Refinancing?
Consumers ask me all the time, “Can you get a home equity loan without refinancing?
The answer is yes. You can leverage the equity in your home with an equity loan or HELOC that provides you the cash you need without refinancing your original mortgage.
There are many alternative loan programs are available that make it simpler and more affordable to get equity.
In this article, I will discuss all the home equity financing options you can go for instead of refinancing to get equity out of your home. So, let’s get started!
Refinancing vs Home Equity
A lot of people are not aware that they can take out a home equity loan without refinancing. We are here to tell you that you can you pull equity out of your home without refinancing if you take out a 2nd mortgage or equity loan.
The difference between a home equity loan and refinancing is that you your 1st mortgage remains the same and you take out a subordinate loan, in addition to your primary mortgage. This new second mortgage is called a home equity loan or HELOC, depending upon whether you want a loan with a fixed rate and lump sum or a revolving line of credit with a variable rate.
Refinancing and home equity loans are often synonymous with getting cash out but they do not have to be done at the same time. If you have a great interest rate on your first mortgage, keep it and get a new 2nd mortgage that provides you the additional money you need for making home improvements, consolidating credit card debt or even real estate investing.
What is Home Equity?
Before I explain how to get equity out of your home without refinancing, you must understand what equity is!
Equity is essentially the portion of your home that you truly own. It’s the difference between the current market value of your property and the outstanding balance on any mortgage loans secured against it.
In simple terms, home equity is the amount of money you would receive after selling your home and paying off any remaining mortgage debt.
Now, how does equity work? As you make mortgage payments over time, you gradually build equity in your home. Additionally, any increase in your home’s market value contributes to the growth of your equity.
Conversely, if your home’s value decreases or if you take out additional loans secured by your home, your equity may decrease.
What is Refinancing and How Does it Affect Home Equity?
When discussing ways to get home equity without refinancing, it is only natural that we first talk about refinancing and how it affects equity.
Refinancing is a financial strategy that involves replacing your current mortgage loan with a new one, typically to obtain better terms or to access the equity in your home.
It essentially allows homeowners to renegotiate their mortgage terms, often to secure a lower interest rate, reduce monthly payments, or change the loan’s duration.
To get a clearer idea, let’s also discuss some types of refinancing.
- Rate and Term Refinance: also called rate and term option, is a type of refinance that updates loan terms like interest rate or duration without withdrawing equity.
- Cash-Out Refinance: involves you borrowing more than owed, converting equity to cash. Cash out refinancing doesn’t always make sense if you already have a low rate and you just need a little cash. Learn more about the timing and pros and cons of cash out refinance loans in 2024.
- Cash-In Refinance: a type of refinancing where you pay down your mortgage balance with additional funds, reducing the loan-to-value ratio.
Now that you know what types of refinancing there are, let’s quickly go through some of its pros and cons:
Pros of Refinancing:
- Lower Interest Rates: Can secure a lower interest rate, reducing monthly payments and overall interest costs.
- Access to Equity: Cash-out refinance allows access to home equity for major expenses.
- Flexible Loan Terms: Can adjust loan terms to suit financial goals, such as switching from an adjustable-rate to a fixed-rate mortgage.
Cons of Refinancing:
- Higher Interest Rates: If the market conditions change and interest rates go up then you could potentially be refinancing into a higher interest rate.
- Closing Costs: Incur fees for refinancing, including appraisal, origination, and other closing costs.
- Extended Loan Term: Extending the loan term may increase the total interest paid over time.
- Risk of Foreclosure: Resetting loan terms may increase the risk of default if financial circumstances change.
It is also crucial to know that the reset loan balance and extended loan term can potentially diminish home equity. Considering the drawbacks and expenses associated with traditional refinancing options, it is a good idea to explore alternative methods to access equity.
How to Get a Home Equity Loan without Refinancing
Here are six affordable ways you can get equity out of your home without refinancing:
HELOC
The Home Equity Line of Credit or HELOC allows homeowners to borrow against the equity in their home with flexible access to funds. Unlike a lump-sum loan, a HELOC functions like a credit card. It therefore enables you to withdraw funds as needed and repay them over time.
Interest rates with HELOC are typically variable, and while there may be no or minimal closing costs, failure to repay could result in foreclosure as the home serves as collateral. The HELOC credit line is very popular with homeowners seeking home improvements and property renovations.
Home Equity Loan
A home equity loan provides homeowners with a lump sum of cash borrowed against the equity in their home. Unlike an equity line of credit, it offers a fixed interest rate and fixed monthly payments over a predetermined term, that typically ranges from ten to thirty years. The home equity mortgage offers a lump sum up front and the loan is amortized with a fixed term for the life of the loan.
The equity home loan is ideal for one-time expenses like home renovations or debt consolidation. However, it requires careful consideration as failure to repay could lead to foreclosure, with the home serving as collateral.
However, while they may incur closing costs, home equity loans also offer competitive interest rates compared to other forms of borrowing, making them a popular choice for accessing equity without refinancing. Today’s home equity loan rates are competitive and usually significant lower than unsecure loans and credit cards.
Personal Loans
Personal loans are small unsecured loans that borrowers can obtain from banks, credit unions, or online lenders. Unlike home equity loans or HELOCs, personal loans do not require collateral, making them accessible to a wider range of borrowers.
A personal loan may offer a fixed interest rate and fixed monthly payment over a specified term, ranging from one to ten years.
Please keep in mind that personal loans usually have higher interest rates compared to equity home loans, but they also provide flexibility in how funds can be used, making them suitable for various purposes such as debt consolidation, home repairs, or emergency expenses.
However, eligibility and interest rates are based on creditworthiness, and failure to repay could negatively impact credit scores.
Sale-Leaseback Agreements
A sale-leaseback agreement involves selling your home to a buyer and then immediately leasing it back from them.
In this arrangement, homeowners sell their property to an investor or buyer, typically in exchange for a lump sum payment. After the sale, the homeowner continues to reside in the home as a tenant, paying rent to the new owner.
Sale-leaseback agreements can provide you with immediate access to your home equity without having to move out. However, goes without saying, that it is paramount that you consider the terms of the lease, including rent payments, duration, and potential buyback options, to ensure it aligns with their financial goals and circumstances.
Home Equity Investments
Home equity investments, also known as shared equity agreements or home equity partnerships, allow homeowners to access a portion of their home’s equity in exchange for a share of the home’s future appreciation.
In this arrangement, investors provide upfront cash to homeowners, which can be used for various purposes such as home renovations or debt repayment. In return, investors receive a percentage of the home’s value at the time of sale or refinancing.
Unlike loans, home equity investments do not require monthly payments or interest charges. At the same time, however, you should carefully consider the terms of the agreement and potential implications on home ownership and equity distribution.
Fixed Second Mortgage Loan
The fixed interest rate second mortgage involves obtaining a new loan, typically at a different interest rate or term, while retaining an existing mortgage as a second line on the property. This is another term for home equity loan refinancing. Many homeowners that take out an equity line of credit choose to refinance when the draw period ends and they do not want to get stuck with a variable interest rate. The home equity loan refinance is recommended for borrowers that want a fixed rate and fixed monthly payment.
This type of 2nd mortgage loan allows you to access additional funds and consolidate debt without refinancing your first mortgage.
Takeaway on Home Equity Loans without Refinancing
Refinancing is costly and can potentially reduce your equity value. To avoid this, people often go for other methods that are more flexible and easy to work around.
So, if you have been wondering how to get equity out of your home without refinancing, I highly recommend you consider the six options mentioned in the article. Weigh the pros and cons of each, and get the loan that aligns best with your financial condition and goals.
Frequently Asked Questions About Using Home Equity Without Refinancing
How do you get a home equity loan without refinancing?
The interest rates on home equity loans vary depending on factors like loan terms and lender policies. For example, typical rates for home equity loans range from around 8.63% to 8.77% for fixed-rate options with terms of 10 to 15 years.
However, the home equity loan rates may fluctuate based on your creditworthiness, market conditions, and lender offerings.
Can you borrow more money on an existing mortgage?
Yes, you can borrow more money on your existing mortgage through options like a cash-out refinance or a second mortgage. Many people take these options to access additional funds by leveraging the equity in their home, as it provides flexibility for various financial needs.
How much equity do I have?
Borrowers need to know how much equity they have before considering a loan. To determine how much equity you have use this simple formula. Take your mortgage balance and divide it by your home value and you will determine you loan to value. Underwriters will be considering your loan to value, debt to income ratio and credit scores as they considering approving you for home equity financing.
How to release equity from a house?
There are various methods through which you can get equity in your house:
- Home equity loans
- HELOCs
- Sale-leaseback agreements
- Equity investments
- Cash out refinancing
Can you have two loans on a mortgage?
It is entirely possible to have two loans (such as a home equity loan or HELOC) while still maintaining a primary mortgage. When a homeowner takes out a second mortgage, they are essentially taking out a second mortgage. You keep your primary mortgage or 1st mortgage and add an additional lien which is called a 2nd mortgage. This comes in handy if you want to access additional funds.
Can I get access to my home equity if I have a low credit score?
If you have a substantial amount of equity in your home and a low loan to value, you may be eligible for a home equity loan with bad credit. BD Nationwide will help you locate lenders that offer poor credit financing. There are also bad credit HELOCs available to borrowers that meet the lending requirements.
What is a good home equity rate?
Currently, the average home equity loan interest rate is 8.67% for fixed equity home loans and 9.88% for HELOC. Note that home equity rates vary depending on market conditions and your own financial factors. Remember to always compare rates from multiple lenders to land the best offers.