You finally own your home upfront and want to use that equity without having to sell. Is it only possible?
Fortunately, the answer is yes. If you qualify, you can get a paid-off home equity loan, or a home equity line of credit (HELOC) or a reverse mortgage – or, you can opt for a cash refinance or an equity investment shared. Each has its advantages and disadvantages.
Can you take equity out of a paid-for home?
You can withdraw equity from your home even after your mortgage is paid off. One of the easiest ways to do this is to sell your home, but there are also financial products that allow you to quickly extract equity from your paid-for home without having to pick up and move.
“It’s entirely possible to take equity out of your home after paying off a previous mortgage,” says Jeffrey Brown, branch manager at Axia Home Loans in Bellevue, Washington. “Assuming you qualify, you can access this equity at any time.”
Reasons to tap into the equity in a paid-for home
Why would someone seek new financing after finally paying off a mortgage? There are many viable reasons, from financing a home improvement project or investing in a business to buying more property. Two good rules to follow: Use your equity for long-term projects that create more value than the cost of the loan, and don’t take more than you can afford to lose.
“Many are looking to pay for their children’s education, fund their retirement, or pay for an unexpected medical emergency like cancer care for a loved one,” says Kelly McCann, a construction and construction lawyer. real estate at Burnside Law Group in Portland, Oregon. .
There are also less good reasons to dip into your capital, such as buying a car (a depreciating asset), paying for a wedding, or taking a vacation. It is important to clearly define your goals in order to make a wise financial decision.
How to get paid home equity
Cash refinance on a paid off home
Suppose you are still paying off your mortgage, have sufficient net worth, and need cash. You would probably do a cash refinance, which usually has a relatively lower interest rate than other types of loans.
You can do the same now, even if you’ve paid off your mortgage. You will only have to take out a new mortgage and pocket equity in the form of cash at closing. However, as with any refinance, you will be liable for closing costs, which can be anywhere from 2-5% of the amount you borrow and any escrow payments.
“A cash-out refinance typically results in the lowest interest rate and offers the highest loan amounts you can borrow,” says Matt Hackett, chief operating officer for Equity Now, a mortgage lender headquartered in in Mamaroneck, New York. “It can be a fixed or an adjustable rate loan, and it’s quite simple to apply and qualify.”
Home equity loan repaid
Alternatively, you can apply for a home equity loan paid off by the house.
Like a cash refinance, a home equity loan is secured by your property (the loan security) and allows you to extract a large amount of equity because you have no other debt attached to the residence. You’ll also likely have to pay closing costs, and like any mortgage, you risk losing your home if you can’t pay it off.
HELOC on a paid house
Many owners appreciate the flexibility of a HELOC, which works more like a credit card that you can use when you need it.
“HELOCs come with adjustable interest rates, often based on the prime rate,” says Hackett. “They offer the ability to withdraw funds and repay funds during the initial drawdown period, which is more flexible than a standard first mortgage.”
Plus, you’re only responsible for paying back the amount you use against the fixed obligation of a cash refinance or home equity loan, says Vikram Gupta, executive vice president and chief home equity for PNC Bank.
“Also, HELOCs generally don’t have closing costs, although they may have early closing costs,” says Gupta.
HELOCs are not as readily available, however, have smaller loan limits in general, and are subject to rising market rates.
Reverse mortgage on a paid-off house
If you’re 62 or older, you may be considering a reverse mortgage. This financing vehicle allows you to obtain regular payments from a mortgage lender in exchange for the equity in your home.
“A reverse mortgage can be a great way for seniors to access the equity in their home to pay their monthly living expenses and allow them to live independently, especially if they have no income. monthly in retirement,” says Brown.
Reverse mortgages have their pros and cons, however. You’ll still have to keep up with homeowner’s insurance, property taxes, and HOA dues to avoid foreclosure, and there’s a limit to how much money you can get. You also can’t let the house fall into disrepair – you will still be responsible for maintenance.
“It’s important for the borrower’s survivors to understand that the entire balance, plus interest and fees, is due if the borrower dies,” says Gupta. “The borrower’s home may have to be sold if their estate cannot repay the reverse mortgage.”
Investment in shares in a house repaid
With a shared equity investment – a new method of liquidating equity – you will sell some of the equity in your future property in exchange for a one-time cash payment.
“Details on how it works and what it costs will vary from investor to investor,” says Andrew Latham, CFP, CPFC, chief content officer and editor of SuperMoney.com. “Let’s say you have a property worth $600,000 with $200,000 of accumulated equity. A home equity investor might offer you $100,000 for a 25% share in the appreciation of your home.
If the value of your home increases to $1 million after 10 years – the typical term for a real estate investment – you will need to repay the $100,000 investment plus 25% of the appreciation, which in this case would be $100,000. $. You will also have to repay the investment plus the appreciation share if you sell the home.
“The benefit here is that you can tap into your home’s equity without going into debt,” Latham says, “and there are no monthly payments, which is a big plus for homeowners struggling with debt. cash.”
In effect, you will have a silent partner in your home, so you will need to be comfortable with that and that partner’s rights to protect their investment.
Advantages and disadvantages of tapping into the equity of a paid-for home
There are rewards and risks associated with accessing equity when you own your home free and clear.
On the plus side, it can be relatively easy to qualify for home equity financing since you already have a strong track record of paying off your first mortgage, which likely means you’re older and have good credit and possibly a higher income. This increases your creditworthiness as a borrower, making you a prime candidate for lenders and reducing the interest rate you’ll pay.
Moreover, you can use your capital for any reason. Most lenders won’t care, for example, whether the money will be invested in funding retirement, starting a new business, or making a down payment on an investment property.
“Also, it may make more sense to dip into your capital rather than selling your home and downsizing,” McCann says. “If you have a capital gain on your home of more than $250,000 (or more than $500,000 if you’re a married couple), you have to pay taxes on that gain after you sell your home. However, if you borrow against your home, for example by taking out a home equity loan, you don’t have to pay taxes on the loan proceeds – you get the money tax-free.
Of course, if you choose a form of financing where your home is used as collateral, such as a cash refinance or a home equity loan, there’s always the risk that you’ll lose your home if you can’t pay it back.
There are also upfront costs associated with many financing products, so you will need to find the funds to pay for expenses such as lender fees and an appraisal, if needed.
Should you mortgage the house you own?
Whether or not you should pull the trigger on a new mortgage, home equity loan, reverse mortgage or equity investment depends on your situation, your short-term financial goals and term and your ability to repay the debt. If you were to lose retirement income, for example, would you still be able to make the payments?
“Owners need to ask themselves, ‘What is the purpose of the necessary funds?’ They should also assess their individual financial situation to ensure they have the cash to repay the loan in the future, especially as they approach retirement,” says Gupta.
“Do your due diligence when shopping for a mortgage, like any financial product, and make sure they shop around with multiple lenders to find the best option and figure out their best course of action,” says Hackett.