How to unlock your home equity during financial turmoil
Key takeaways
- Homeowners can use their home equity as a source of quick and potentially lower-cost cash in times of financial emergencies.
- Options for accessing home equity include shared equity agreements, home equity loans and HELOCs, and cash-out refinances.
- Home equity loans/HELOCs and cash-out refis are forms of financing that either augment or replace your mortgage.
- Shared equity agreements, in which an investor buys a stake in your home, are convenient if the eligibility guidelines for traditional home equity products are too stringent or you want to avoid additional debt or monthly repayments.
Financial emergencies such as medical expenses, car breakdowns, unexpected fines and even urgent pet care can easily dam up your cash flow. Although inflation has significantly decreased since reaching its peak in June 2022, prices still are high — especially when it comes to services — and recession fears still trouble many Americans. The average consumer has to carefully consider their options to stay afloat financially.
Though an emergency fund is good insurance against financial turmoil, maintaining one is not always an option. Only 43 percent of Americans have enough in savings to cover a $1,000 emergency expense, according to Bankrate’s latest annual emergency savings report, while 22 percent of U.S. adults have no emergency savings at all. And even if they do, back-to-back crises can quickly deplete an account. Taking out a personal loan or using a credit card may cover the costs now, but their high interest rates can lead to a rapidly mounting debt burden down the road.
However, homeowners who have built up equity have another option. By cashing in on the ownership of your home, you can both pay bills and avoid the highest interest rates when tough financial times come knocking.
Here are ways to unlock your home equity.
How home equity can be an option for unexpected expenses
Home equity is the share of your residence that you own outright; essentially, it’s the difference between your home’s value and the amount you owe on a mortgage. The more you’ve paid on your mortgage and the more your home’s market value increases, the more equity you have available. There are several options to cash in on your home value:
- shared equity agreements
- home equity loans/home equity lines of credit (HELOCs)
- cash-out refinances
| Cash-out refinance | Home equity loan | HELOC | Shared equity agreement | |
|---|---|---|---|---|
| Amount of equity required | 20 percent equity | 15 percent to 20 percent equity | 15 percent to 20 percent equity | 20 percent equity |
| Minimum credit score requirement | Varies — typically 620 | Mid-600s | Mid-600s | 500 |
| Maximum borrowing amount | 80 percent of equity | 85 percent of equity | 85 percent of equity | 10 percent of total home value |
| Approval time | 45 to 60 days with 3-day waiting period | 14 to 42 days | 30 to 60 days | 10 to 30 days |
| Payout | Lump sum | Lump sum | Line of credit | Lump sum |
| Interest rate | Fixed or variable | Fixed | Variable | None |
| Repayment terms | Fixed monthly payment over 15 to 30 years | Monthly payment over 5 to 30 years | Variable extra monthly payment over 20 years | No monthly payments; owner pays back agreed-upon percent of home value, or investment plus appreciation |
| Fees | 3-5% of loan principal | 2-5% of total loan | 2-5% of total loan | 3% of total loan, other closing costs |
Accessing home equity through sharing agreements
In an shared equity agreement, equity investment companies purchase a part of the home’s ownership, paying the homeowner in cash for it, in exchange for the right to cash in on the home’s appreciated value in future. Homeowners either buy out the investors’ equity share after an agreed-upon time period or pay out a percentage of the amount they later sell the house for. In the meantime, they don’t have to make any repayments.
This arrangement can be appealing for homeowners looking for alternative ways to get equity out of their home but who may not be able to afford increased or additional monthly payments of a refinanced mortgage or loan. Also, sharing agreements can be comparatively quicker in closing and have lower credit requirements than home equity loans and cash-out refis.
While there are downsides to equity sharing, here are a few reasons why this option may be for you.
Lower requirements
Home equity shares often come with more lenient criteria than a refinance, home equity loan or HELOC. If your credit score has taken a dip due to bill pileups, or if you don’t meet the income requirements for traditional equity cash out methods, a home equity share can still free up your money while you recover.
Faster cash out
Home equity shares can get money into your hands more quickly. While there is still a turnaround time for application approval and house inspection, equity shares can offer a faster cash out than traditional equity access methods — sometimes in as little as 10 days — with no waiting periods.
No monthly payments
One of the biggest benefits to an equity sharing agreement is no monthly payment. Refinances, equity loans and HELOCs can put a wallop on your wallet with increased or additional monthly payments. Home equity shares, however, only require payment upon sale of the home or at the end of the sharing agreement, giving you a chance to get back on your feet before you pay.
Avoid rising interest rates
You don’t need to pay interest on an equity share when it’s time to sell your home or buy back the share. This means that even as interest rates rise, your payment will remain the same.
Other ways to access home equity
Home equity loans/HELOCs
The traditional home equity loan allows homeowners to borrow a lump sum, based on the value of their home equity stake, and to repay it in fixed installments over one or two decades. A home equity line of credit (HELOC) works similarly, only it allows for flexible withdrawal amounts over a set period. Interest is charged at a variable rate, but you only pay interest on the amount you actually borrow.
While separate from a mortgage, these loan products do require an approval process not unlike underwriting. Since your home is securing the debt, the lender can foreclose on it if you fail to make payments.
Cash-out refinance
A cash-out refinance is a type of mortgage allowing you to replace your current mortgage with a larger loan; you receive the difference in cash, which is based on the value of your home equity. Since it is essentially a new mortgage, you will go through the same application and underwriting procedure; it may be more streamlined that your first mortgage’s, however.
What to consider when cashing out equity during an emergency
While home equity can be a financial cushion, it’s not a good idea to treat your home as a piggy bank for incidental expenses. Cashing out your equity doesn’t happen instantly, and comes with fees, requirements and other factors to consider.
Most equity loans, HELOCs, refinances and sharing requirements require that you have at least 20 percent equity in your home, while some require that 20 percent equity remains after the cash-out. These options also have income requirements and credit score minimums.
Additionally, a cash-out refinance replaces your previous monthly payment and term and starts it anew, while home equity loans and HELOCs require a separate payment on top of your primary mortgage payment each month. For these options, the liens — the total amount of debt attached to your home — essentially increases.
Finally, refinancing, home equity loans and HELOCs can take a number of weeks for approval. Since they’re essentially loan applications, you won’t be able to access your money immediately. They also all come with closing fees.
Equity sharing agreements avoid many of these issues, since the money you receive is technically an investment, not a loan. However, most agreements are structured so that, at payback time, the investor receives a positive return on their investment. If they buy a 10 percent stake in your home, they might receive the equivalent of 16 percent of its value when the agreement ends, for example.
In other words, the homeowner usually ends up paying more than the amount they received — and, if the home has appreciated in value, sometimes more than what the interest on a loan would’ve been.
The bottom line
While a financial emergency can add a lot of stress to your life, it isn’t the end of the world. Your homeownership can give you an extra layer of protection when things go wrong — though keep in mind that it shouldn’t replace having insurance or an emergency fund on hand when it comes to preparing for the unexpected.
Home equity loans and HELOCs, cash-out refinances and shared equity agreements are all ways to tap your ownership stake. Each has different pros and cons, so be sure to weigh each option carefully.
Additional reporting by Allison Martin
