Alternative ways to get equity out of your homeAlternative ways to get equity out of your home

If you’re a homeowner and need to borrow money, your home equity can be an attractive place to look. Home equity (the difference between your property’s market value and the outstanding balance on your mortgage) is a resource that many homeowners can tap into for various purposes, such as renovations, debt consolidation or investments. In this article, I’m going to go through the various alternative ways to access home equity, and the pros and cons of each method.

Why cash out refinances are so popular right now, despite higher mortgage rates

In today’s world, cash-out refinances are really popular because they’re tied to your home. Because of this link, the interest rates are lower compared to loans that aren’t connected to your home, like personal loans. Lenders think these loans are safer because your house backs them up. This safety makes them happier to lend money and offer better deals to people. So, homeowners can get a good amount of money at lower interest rates with cash-out refinances, which makes them a smart choice for using the value of your home without spending too much on borrowing.

Cash-out refinancing involves replacing your existing mortgage with a new one for an amount larger than what you owe on your home. The excess amount is given to you in cash, representing the equity you’ve accumulated. This method often offers a lower interest rate compared to personal loans or credit cards, making it an attractive option for accessing significant sums of money.

Exploring Alternative Methods

Home Equity Line of Credit (HELOC)

HELOCs operate similarly to credit cards. They allow homeowners to borrow against the equity in their homes up to a certain limit over a specified period, known as the draw period. During this time, borrowers can access funds as needed and only pay interest on the amount withdrawn. Once the draw period ends, a repayment period begins, during which borrowers repay both the principal and interest. HELOCs provide flexibility and can be a cost-effective option for homeowners needing periodic access to funds.

Equity Sharing Products: Point.com, Unison, QuantumRE, etc.

“Equity sharing” companies provide homeowners with a way to access their home equity without taking on additional debt, such as refinancing the entire mortgage. In exchange for a percentage of the home’s future appreciation, they offer a lump sum of cash. This allows homeowners to access funds without monthly payments or interest. However, there are significant considerations when exploring equity sharing products. Mainly, you often have many restrictions on your home and what you can do with it as you have to enter into a contract as a co-owner in many cases. Also, the financial benefits often do not work out as expected, when you do a deep dive into the math and trade offs.

Bottom line: read the fine print and make sure you know what you’re getting into. These are alternatives to a HELOC and a cash-out because they often target people who do not qualify for HELOCs or cash-out refinances. Which can put them in the sub-prime category. And as with any product that targets people with lower credit or assets, you want to watch out for the trade-offs because they can be significant.

Choosing the Right Option

Selecting the best method for accessing your home equity depends on your financial goals, current mortgage terms, and personal circumstances.

Before committing to any one product, it’s essential to understand the terms, potential risks, and implications of each option. Evaluate the long-term impact on your financial situation and consider how each method aligns with your objectives.

If you need help figuring out which option is best for you, in weighing the pros and cons, you can book a call with me or email me for professional advice.