- There are five main options for tapping into the equity in your home that is fully paid off
- Among the advantages of doing so, you can consolidate high-interest debt or use the money to invest.
- Disadvantages include having to make monthly payments and incurring debt that uses your home as collateral.
You’ve finally paid off your house and you’re lucky to have zero monthly mortgage payments. It’s a great feeling.
Your home is more than likely to be your most valuable asset. And since you own it outright, you have a lot of money locked in there.
Can you tap into the equity in a paid-for home?
Having a fully paid-for home means you can tap into the equity in it. And since you own it free and clear, it can give you access to a large sum of money.
There are several ways to tap into the value of your paid-off home, including a cash refinance, a home equity loan or line of credit, a reverse mortgage, and a relatively new option known as equity splitting. of the property.
Should you borrow against a house that you own freehold?
Whether or not you should borrow against your home paid off will be determined by your financial situation and why you need the money.
“If you’re not planning to move, accessing that money with debt makes sense, especially if the alternatives are more expensive debt,” says Dennis Shirshikov, strategist for Awning.com, a real estate technology and brokerage firm focused on on investment. “It’s even better if you access equity to make investments that will surpass the interest rate you pay for the money you borrow.”
Other scenarios in which it may make sense to borrow include using the money to renovate or repair your home, or paying off credit card debt with high interest rates.
Advantages and disadvantages of exploiting the equity in a paid house
There are risks and rewards to borrowing against a home that you own upfront and clear. You may want to raise funds to put back into the house and increase its value. You may also have an investment opportunity that would yield a higher return than the rate you pay on borrowed money.
If you have credit card debt at higher interest rates, tapping into your home equity is one avenue to consider to pay it off.
Remember, though, that when you leverage the equity in your home, you’re essentially taking out a mortgage that’s secured by the value of your home.
“All mortgages come with interest payments and collateral,” notes Nate Johnson, real estate investment expert at NeighborWho, a property data provider. “Mortgages are also secured loans, which means the homeowner can potentially lose the house to foreclosure if they stop making payments.”
5 ways to tap into the equity in a home you paid for
These are the top five ways to get cash out of a home you own for free and clearly.
1. Refinancing by collection
A cash refinance is a new mortgage. You take out a loan greater than the amount you still owe (which is nil in the case of a home you own freehold), and you receive the balance in cash at closing. This option is good if you want to withdraw a large amount of money.
The total you are allowed to receive in cash may depend on your lender. Generally, you cannot receive more than 80% of the value of your home in cash. You will also have to pay closing costs.
2. Home Equity Line of Credit (HELOC)
With a HELOC, you receive a revolving line of credit instead of a lump sum loan amount, where you can borrow money over time.
Since the interest rate is variable, the monthly payments on the borrowed capital can also fluctuate. If you want to borrow money as you go and don’t mind the variable interest rate, a HELOC might be a good option. However, your “house is used as collateral, so if your financial situation deteriorates, it could put your house at stake,” Shirshikov notes.
3. Home Equity Loan
A home equity loan allows homeowners to borrow against the value of their home. Most lenders allow you to borrow up to 80% of the home’s value. If the money you need is less than 80% of the home’s value, a home equity loan is “the cheaper option than cash-out refinancing because there are fewer closing costs, or even none,” says Shirshikov.
Home equity loans offer fixed interest rates with constant monthly payments.
4. Reverse Mortgage
A reverse mortgage is for homeowners age 62 or older who can borrow a lump sum that is repaid in monthly installments or as a line of credit against the equity in the home.
In a reverse mortgage, when the home is finally sold, the proceeds from the sale will go to the lender to pay off your reverse mortgage balance. Any remaining money will go to you or your estate. If your heirs want to keep the property, they can pay off the reverse mortgage themselves.
5. Participation in the share capital
A relatively new option is a shared stock investment.
“A lender will pay you a lump sum of cash for an equity share in the home,” says Omer Reiner, president of real estate investment firm FL Cash Home Buyers, LLC. “You can keep a majority stake in the house, but you can forgo home equity growth in the future”
The main advantage of home equity sharing is that it is not debt. There are no payments or interest, and you can use the money as you wish. However, it can also cost you dearly if your home appreciates a lot during the term of your contract.
“Let’s say a homeowner sells 25% of their net worth and their house goes up in value by $100,000,” Reiner explains. “The owner only keeps $75,000.”
Most equity companies also require you to repay them in one installment at the end of your term.
The bottom line
Before tapping into your home’s equity, carefully review all options and fully understand the terms and conditions of each.
“Homeowners should never take out a mortgage unless they know the financial terms,” Johnson says. “They should consult a lawyer, and possibly an accountant if they have any additional questions, especially legally binding ones.”