Getting a Home Equity Loan Without a Refi
Perhaps you’re strapped for cash and want to take equity out of your home, but you hope to avoid refinancing. Well, you can. In fact, you have multiple options for getting a home equity loan without a refi, including through a home equity line of credit (HELOC), a home equity loan itself, and home equity investments.
The Issue
U.S. homeowners have witnessed the substantial growth of equity in their properties over the last few years. In fact, in the final quarter of last year, home equity rose year-over-year by more than $3.2 trillion, according to CoreLogic. Your aim is to tap into that equity without replacing your existing mortgage with a new one. The good news is that: you can.
What is Equity?
Having equity in your home means that the sum you own on your house is less than your home’s value. The amount of equity you have can increase over time as you pay down your mortgage or add to your home’s value.
HELOCs
HELOCs are lines of credit that are based on the equity in your home, which is used as collateral. Your equity becomes a kind of credit card, in that you can pull cash from it whenever you want over about 10 years. You also can withdraw as much as you want, up to your limit. When the draw period ends, the repayment period of about 20 years begins.
A HELOC may carry a lower interest rate than some other kinds of loans, and you may be able to deduct the interest. Check with your tax advisor. Also, you’ll have a variable interest rate, which means the rate can change from month to month.
Typically, you can borrow up to 85 percent of your home’s value less how much you owe. And just as when you first got your mortgage, whether you’re eligible for a HELOC hinges on your credit score and history, monthly income and debts, and employment situation.
Home Equity Loan
A home equity loan is essentially a second mortgage that’s secured by your house. It’s disbursed in a lump sum, and to repay it, you’ll make fixed monthly payments.
You’ll typically be able to borrow up to 80 percent of your home’s value. So if you have a home worth $400,000, the most you could borrow is $320,000.
In terms of how to get a home equity loan, you’ll generally need good-to-excellent credit and proof that you have the ability to pay the loan back. You’ll also need a debt-to-income ratio that’s at or under 43 percent. Moreover, you’ll need a maximum loan-to-value ratio of 80 percent or 20 percent equity left in your home following financing.
Home Equity Investments
This is a lesser-known strategy, but with it you can hit up your equity without assuming additional debt. How it works is, an investor will purchase a share of your home’s equity. Then, in 10 or 30 years, when the term ends, you’ll buy the investor out based on the home’s existing market value.
While home equity investments are interest free, you will wind up paying more if your home goes up in value by the time your term ends. Beware also of service fees that are usually 3 percent to 5 percent of the payment.
To qualify, you also must have a good deal of equity. Equity sharing pacts typically permit a loan-to-value ratio of between 75-80 percent. This means you’ll have to keep at least 20-25 percent equity in your home.
Whether it’s to fund home renovations, pay for tuition, cover unexpected expenses, or something else, getting a home equity loan without a refi is imminently doable. Just go over your financial situation — and choose the option that’s best for you.
