5 ways to tap the value in a paid-off home for cash
- There are five main options to tap into the equity of your home that’s fully paid off
- Among the benefits of doing so are that you can consolidate high interest rate debts or use the money to invest.
- Cons include having to make monthly payments and taking on debt that uses your home as collateral.
You’ve finally paid off your house and are blessed to have no monthly mortgage payment. It’s a great feeling.
Your house is more than likely to be your most valuable asset. And since you own it outright, you have a lot of money locked up in it.
Can you tap the equity in a paid-off house?
Having a house totally paid off means you can tap the equity in it. And since you own it free and clear, it can provide you with access to a significant amount out of cash.
There are several ways you can tap the value in your paid-off home, including a cash-out refinance, a home equity loan or line of credit, a reverse mortgage, and a relatively new option known as home equity sharing.
Should you borrow against a house you own free and clear?
Whether or not you should borrow against your paid-off house will be determined by your financial situation and why you need the money.
“If you don’t plan on moving, accessing that money with debt makes sense, especially if the alternatives are more expensive debt,” says Dennis Shirshikov, a strategist for Awning.com, a real estate technology company and brokerage focused on investing. “It’s even better if you are accessing the equity to make investments that will outperform the interest rate you are paying for the money you borrow.”
Other scenarios in which it might make sense to borrow include using the money to remodel or repair your home, or paying off credit card debt with high interest rates.
Pros and cons of tapping equity in a paid-off house
There are risks and rewards involved with borrowing against a house that you own free and clear. You may want to raise cash to put back into the house and increase its value. You may also have an investment opportunity that would have a return that’s higher than the rate you’re paying on the borrowed the money.
If you have credit card debt at higher interest rates, tapping into your home equity is an avenue to consider to paying it off.
Remember, though, that when you tap the equity in your home, you are essentially taking out a mortgage that is backed up 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 owner can potentially lose the home in foreclosure if they stop making payments.”
5 ways to tap the equity in a home you have paid off
These are the five main ways you can get cash out of a house you own free and clear.
1. Cash-out refinance
A cash-out refinance is a new mortgage. You take out a loan larger than the amount you still owe (which is zero in the case of a home you own free and clear), and you receive the balance in cash at closing. This option is good if you want to take out a significant amount of money.
The total you’re allowed to receive in cash may depend on your lender. As a general rule of thumb, you can’t receive more than 80% of your home’s value in cash. You’ll 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.
The interest rate is variable, so monthly payments on the principal amount borrowed may fluctuate as well. If you want to borrow money as you go and you don’t mind a variable interest rate, a HELOC can be a good option. However, your “home is used as collateral so if your financial situation deteriorates, it could put your home on the line,” Shirshikov notes.
3. Home equity loan
A home equity loan allows homeowners to borrow against the value of their home. Most lenders will let you borrow up to 80% of what the home is worth. If the cash you need is less than the 80% of the home’s value, the home equity loan is the “less expensive option than the cash-out refinance, since there are less, if any, closing costs,” says Shirshikov.
Home equity loans offer fixed interest rates with consistent monthly payments.
4. Reverse mortgage
A reverse mortgage is for homeowners age 62 or older who can borrow a lump sum that is paid back in monthly installments, or as a line of credit against the equity in the home.
In a reverse mortgage, when the home is eventually sold, proceeds from the sale will go to the lender to pay off the balance of your reverse mortgage. Any money remaining will go to you or to your estate. If your heirs want to keep the property, then they can pay off the reverse mortgage themselves.
5. Shared equity investment
A relatively new option is a shared equity investment.
“A lender will pay you a lump sum of cash for a share of equity in the house,” explains Omer Reiner, president of real estate investment company FL Cash Home Buyers, LLC. “You can keep controlling interest in the house, but you may give up growth in equity of the home in the future”
The key benefit of home equity sharing is that it’s not a debt. There aren’t any payments or interest, and you can use the money however you want. However, it can also cost you big if your home appreciates a lot over the course of your agreement’s term.
“Let’s say a homeowner gives up 25% equity and the house grows $100,000 in value,” says Reiner. “The owner keeps only $75,000.”
Most equity sharing companies also require you to pay them back in one single payment at the end of your term.
The bottom line
Before tapping into your home equity, consider all the options carefully and fully understand the terms and conditions for each.
“Homeowners should never take out a mortgage unless they know what the financial stipulations are,” says Johnson. “They should consult a lawyer, and potentially an accountant if they have additional questions, especially legally binding ones.”