How to Take Equity Out of Your Home

Tapping into your home equity is a great way to access funds for immediate financial needs. While selling your home is one way to achieve this goal, there are many other solutions that allow you to take equity out of your home without abandoning your property. Learn about these six alternative ways to get equity out of your home.

Cash-Out Refinance

With cash-out refinancing, a homeowner replaces their current mortgage with a newer, larger loan. This refinancing strategy results in access to a lump sum of cash reflecting the difference between your new loan amount and the existing mortgage balance.

How Does a Cash-Out Refinance Work?

In the cash-out refinance process, you'll first submit an application for a new mortgage loan, which indicates the amount you want to borrow on top of your current balance. Then, you'll need your property appraised for its current market value. Upon approval, you'll receive a new mortgage balance that includes both of these amounts. After paying off your existing mortgage with the funds received, you can apply the remainder towards immediate financial demands.

To receive approval for a cash-out refinance, you must typically have at least 20% equity in your home, a good credit score, and proof of reliable income. Similar to a home equity loan, a cash-out refi involves fixed monthly payments that begin immediately.

Pros of Cash-Out ReFi

Before choosing this option to unlock home equity, take into account the following cash-out refinance pros and cons.

• Upfront Cash: Cash-out refinancing offers you a lump sum of money that can be used for mortgage payments and other expenses in relatively no time.

• Lower Interest Rates: Mortgage interest rates are usually lower than other forms of borrowing. Plus, if current mortgage interest rates are lower than the rate you're paying for your existing mortgage, you could have smaller monthly payments.

• Tax Deductions: You may be eligible for tax deductions on the interest you pay on your cash-out refinance.*

• Flexible Terms: Cash-out refis typically involve fixed, predictable repayments. Other options may have flexible terms featuring longer repayment periods or variable interest rates.

Cons of Cash-Out ReFi

• Increased Debt: With a higher loan amount and potentially higher monthly payments, you may see an increase in mortgage debt.

• Equity Reduction: Cash-out refinancing erases the amount of equity you've built in your home and limits your ability to access funds in the future.

• Closing Costs: Application costs, appraisal fees, and other closing costs add up when cash-out refinancing.

• Risk of Foreclosure: Failure to pay your new mortgage payments could put your home at risk of foreclosure.

Home Equity Line of Credit

A home equity line of credit, also known as a HELOC, is a borrowing option that allows you to access cash using your home equity as collateral.

How Does a Home Equity Line of Credit (HELOC) Work?

HELOCs function similarly to a traditional credit card, with your home acting as the credit line.

To begin the HELOC mortgage process, a lender will need to assess three factors: your current financial standing, the amount of home equity you have, and your home's current market value. After you're approved for a home equity line of credit and a credit limit is determined based on your home's equity, you can use the funds at any time for any amount (up to the limit).

In order to get approved for a HELOC, you must be at least 18 years old, have a stable stream of income and good credit score, and own around 15% to 20% equity in your home. Once your HELOC's funds are depleted, you'll enter the repayment period, which typically involves monthly payments on the principal and accrued interest.

Pros of Home Equity Line of Credit

As with other equity alternatives, there are several advantages and disadvantages of home equity lines of credit to consider before borrowing.

• Flexible Use: Borrowers can use HELOC funds for a wide variety of purposes and are given flexibility in how and when they can access cash.

• Long Draw Period: With a longer draw period, you have ongoing access to your approved credit line — giving you flexibility to borrow as needed over time, rather than all at once. This can be especially helpful if you're planning a multi-phase project or want to spread out expenses.

• Tax Benefits: If funds are used on relevant payments, such as home improvements, a HELOC's interest may be eligible for tax deductions.*

Cons of Home Equity Line of Credit

• Variable Interest Rates: Over the course of a HELOC, there is a potential for interest rates to change and result in higher monthly payments.

• Temptation to Overspend: With revolving access to funds, a HELOC can make it easy to borrow more than you may have originally planned. While affordability is assessed upfront, it’s still important to borrow thoughtfully and stay focused on your long-term financial goals.

• Risk of Foreclosure: Since a HELOC uses your home as collateral, missing required payments puts your property at risk of foreclosure.

Home Equity Loan

Home equity loans, or second mortgages, are fixed-term loans that allow homeowners to borrow against their property's equity.

How Does a Home Equity Loan Work?

Acquiring a home equity loan requires a lender to assess your financial standing and the amount of home equity you have, along with an up to date appraisal of the property in question. If you're approved, you'll be given an upfront lump sum based on these factors, which can be used to cover important expenses.

Pros of Home Equity Loans

There are many pros and cons of home equity loans to be aware of, including:

• Access to Cash: A single lump sum payment is perfect if you're looking to pay off major expenses quickly.

• Stable Interest Rates: Home equity loans function at fixed rates and involve consistent monthly payments, regardless of market conditions.

• Longer Repayment Terms Available: Depending on the lender, home equity loans may offer repayment periods ranging from 5 to 30 years — giving you the option to spread out payments and potentially lower your monthly obligation.

Cons of Home Equity Loans

• Decreased Home Equity: If the real estate market drops, your home value could drop, too, and leave you with a loan balance exceeding your property's value.

• Risk of Foreclosure: Because this loan is secured by your home, you could be at risk of losing your property if you fail to meet your monthly payments.

• Additional Costs: On top of adding a second monthly mortgage payment, home equity loans come with appraisal fees and closing costs.

• More Qualification Requirements: As opposed to other home loans, home equity loans usually follow stricter eligibility criteria.

Home Sale Leaseback

If you'd prefer to access home equity without refinancing or accruing debt, consider a home sale leaseback. This is a real estate transaction in which a homeowner sells their property and becomes a tenant, continuing to live in their home (or elsewhere) while paying rent for the house.

How Does a Home Sale Leaseback Work?

After finding a buyer, the home sale leaseback option works just like selling a home. In this sell and leaseback process, you'll define terms and transfer ownership to the buyer, who will then ask you to sign a lease agreement. Then, you can either begin living in your home as a tenant or lease the property out while living elsewhere, as long as you make regular rental payments to the buyer-turned-owner.

Pros of Home Sale Leaseback

Here are a few sale and leaseback advantages and disadvantages that can help you decide whether this option is right for you.

• Quick Access to Funds: Selling your property gives you immediate access to a lump sum that you can use toward other expenses as needed.

• Rental Perks: Selling and renting back your house can help eliminate or reduce mortgage debt — and you may be less affected by future real estate market swings.

• Lower Maintenance Responsibility: In many leaseback agreements, major home maintenance and repair costs shift to the new owner, reducing your financial and logistical burdens as a tenant.

• Negotiable Terms: Because buyers and sellers can agree on terms without traditional lender restrictions, leasebacks may offer more flexibility and help you avoid added fees.

• Flexibility to Stay or Move: Entering a home sale leaseback gives you the option to remain in your current home for a set period or relocate when the time is right.

Cons of Home Sale Leaseback

• Loss of Ownership: Once you give up ownership of your home, you can no longer benefit from property appreciation, build home equity, or make property-related decisions.

• Risk of Eviction: Failure to make lease payments or other violations to the contract could result in eviction.

• Rental Payments: Home sale leasebacks result in regular rental payments, which could increase based on market fluctuations depending on the terms.

• Tax Liabilities: You may be responsible for potential tax liabilities on the capital gains associated with the sale of your property.

Reverse Mortgage

Reverse mortgage loans are unique alternatives to home loans. They allow homeowners over the age of 62 to convert a portion of their home's equity into cash. Unlike traditional mortgages, where homeowners make monthly payments to a lender, reverse mortgages require lenders to make regular payments to the borrower.

How Does a Reverse Mortgage Work?

To get a reverse mortgage, you must first submit your application. The lender will conduct a home appraisal, and if approved, you'll be given an estimate – determined by the amount of equity you've built in your home. Rather than making regular payments to the lender, these payments will be disbursed to you to use as you please. You (or your loved ones) must repay these funds when you sell your home or pass away. To be eligible for a reverse mortgage, you must be at least 62 years old and have a significant amount of home equity.

Pros of Reverse Mortgages

Below are the primary advantages and disadvantages of reverse mortgages.

• Increased Cash Flow: Payments from a reverse mortgage can help supplement your income or provide you with a financial safety net.

• Flexible Payment Options: Reverse mortgage funds can be distributed to you via a lump sum payment, line of credit, regular monthly payments, or a mix of these options.

• Continue Living in Your Home: One of the major benefits of a reverse mortgage is that you can continue to maintain ownership of (and live in) your home.

• Safe From Market Fluctuations: Reverse mortgages are considered non-recourse loans, meaning you won't be personally liable for any loan amount that exceeds your home's value.

Cons of Reverse Mortgages

• Additional Costs: Depending on the lender and terms, reverse mortgages can incur additional costs, including administrative fees, closing costs, monthly servicing fees, and more.

• Accumulating Interest: A reverse mortgage accumulates interest over time, which may decrease the amount of home equity you own and negatively impact your heirs until the loan is repaid.

• Impact on Government Benefits: Receiving a reverse mortgage may make you ineligible for government benefits, such as supplemental security income (SSI) and Medicaid.

• Risk of Foreclosure: Falling behind on maintenance fees, property taxes, or other homeowner payments could put you at risk of losing your home.

Home Equity Sharing Agreement

A Home Equity Sharing Agreement (HESA), Shared Equity Agreement, or Home Equity Investment, is a way for homeowners to access a portion of their home equity without taking on additional monthly payments or selling their property.

How Do Home Equity Agreements Work?

The process and terms will vary by provider, but generally a home equity agreement works by homeowners first receiving a lump sum of cash in exchange for a percentage (typically between 15-50%) of the appreciation of their home in the future. Unlike a traditional loan, you don't have to make any monthly payments and simply pay when you sell your property or the agreement ends.

Pros of Home Equity Agreements

Below are the following pros and cons of a home equity sharing agreement.

• Access to Funds: You can get a large sum of money without taking on additional debt.

• No Monthly Payments: You don't have to worry about making monthly payments.

• Home Appreciation: You can share in the profits if your home value increases.

• Flexible Terms: Homeowners can choose the term of the agreement and the percentage of appreciation to share.

Cons of Home Equity Agreements

• Loss of Equity: You will be giving up a portion of the potential change in value of your home to the investment company.

• Not One-Size-Fits-All: Equity sharing agreements are unique, just like the homeowners they serve. As such, they are not the right fit for everyone. It’s important to make sure you understand the agreement and how it may impact you.

• Refinancing: Some mortgage lenders may decline to provide new loans to you because you have subordinate financing that shares in equity or home appreciation.

• Risk of Foreclosure: Because an ESA is secured by your home, you could be at risk of losing your property if you fail to meet your monthly payments.

Unison can help convert up to 15% of your home's value to cash, so you can put those funds to work for you and continue owning your home. Like other home equity agreements, Unison features no monthly payments or added interest. But the best part is that we often share in your loss, should your home decrease in value. And we make it easier than ever to end your agreement or sell your home if your circumstances suddenly change.

Equity Sharing Home Loan (ESHL)

If you’re looking for a way to access your equity that doesn’t come with the pressure of large monthly payments or the permanence of selling your home, an Equity Sharing Home Loan (ESHL) could be a smarter alternative.

How Does an Equity Sharing Home Loan Work?

The ESHL is an interest-only loan that offers homeowners a lump sum of cash at relatively low rates, offset by sharing a portion of the future change in their home’s value. Monthly payments can typically be about half what they would be with a conventional home equity loan. The loan is settled when you sell your home, refinance, or reach the end of the agreement.

Pros of an Equity Sharing Home Loan

Lower Monthly Payments: Thanks to the equity sharing element securing a lower rate, payments stay significantly lower than standard loan options. Stay In Control: You stay in control of your home and avoid selling just to access equity. Flexibility at Every Step: Whether you're funding renovations, consolidating debt, or investing in your future, the ESHL has no usage restrictions, no prepayment penalties, and the ability to defer interest (up to 25%) to make even lower payments if life gets in the way.

Cons of an Equity Sharing Home Loan

Future Appreciation: Because repayment is based partly on your home’s value when you exit the agreement, the final payoff may be higher if your home significantly appreciates. Balloon Payment: While monthly payments remain low, there is a lump-sum payoff at the end of the term, which you’ll need to plan for.

Risk of Foreclosure: Because this loan is secured by your home, you could be at risk of losing your property if you fail to meet your monthly payments.

The ESHL is designed for homeowners who want the benefits of borrowing against equity, without the typical drawbacks. It’s not free money – but it can be a smarter, more flexible way to put your home equity to work.

Want to see how much you could unlock? Get a free estimate with Unison — no credit impact, no obligation.

*We strongly recommend consulting with a tax professional for tailored advice regarding individual tax liabilities. 

This content is provided for general informational and educational purposes only and is not intended to serve as financial, investment, legal, tax, or lending advice. The information presented may not apply to your specific situation, and actual outcomes can vary based on individual circumstances, market conditions, and applicable laws. Home equity sharing agreements and loans involve risks, including the potential loss of future home appreciation or other financial implications. Terms, availability, and eligibility for any products mentioned may differ by state, lender, or other factors. We strongly recommend consulting with a qualified financial advisor, attorney, or licensed professional before making any decisions or entering into agreements. Unison Mortgage Corp. is a licensed lender (NMLS ID 2574289); this article may include promotional content related to its services.