How to Turn Your Home’s Equity Into Cash

At the time of writing this, almost half of America’s homeowners are now considered “equity rich,” meaning they have at least 50% equity. In other words, if their home is worth $400,000, they owe less than $200,000 on their mortgage.

A common question we get from clients is “What can I do with that equity?” For some people, it can feel odd to be sitting on $200,000 of “imaginary money” and not know what to do with it.

Below are the five (plus a bonus) most common ways for homeowners to turn equity into cash.

**Note: with all of these options, various terms and conditions apply**

1. HELOC (Home Equity Line of Credit)

A HELOC is a financial product offered through your local bank or credit union that offers homeowners a line of credit based on a % of their current equity and home value. With a HELOC, a homeowner can cash out the difference between their current loan balance and up to 80%* of their home value (e.g. a loan balance of $200,000 on a $400,000 home could provide opportunity for someone to access $120,000 cash). A HELOC is typically a 20 year product broken into two 10 year time blocks. For the first 10 years, you can spend the money and you only have to pay interest on what you’ve spent. There is no requirement during that time to pay down the amount borrowed. After the first 10 years, you are no longer allowed to spend the cash; you just start paying back the balance like a normal loan.

For example, you might get a $50,000 HELOC but only spend $30,000 to build an awesome deck. You spend that money during the first six months, then spend the next 18 months paying off $10,000 of the $30,000 (plus interest). Five years later, you decide to borrow $15,000 to remodel your kitchen. Now you’re back owing $35,000 ($20,000 plus $15,000). You then spend the next five years paying that balance down to $25,000. At ten years, no more spending is allowed. Your HELOC now transitions to a normal “pay this $25,000 off over the next 10 years” loan.

PROS: HELOCS are fairly fast and cheap to obtain. Only have to pay interest on the money you spend.
CONS: Variable interest rate. People can forget about the 10 yr/10 yr structure.  

*various HELOC products might allow access to varying % of home value

2. HELOAN (Home Equity LOAN)

The main difference between a HELOC and HELOAN is that with HELOAN, you get a lump sum up front and have a fixed repayment schedule based on that amount - typically spread out over twenty years. The interest rate is generally lower than with a HELOC and fixed (not variable like a HELOC) so a HELOAN can be a more affordable option if the intent is to immediately spend all the borrowed funds on a large purchase.

PROS: Typically offer a fixed interest rate that’s cheaper than a HELOC; fairly fast and cheap to obtain.
CONS: Interest is accrued based on total amount of money borrowed, regardless of whether money has been spent.

3. Cash-Out Refinance

This is a WHOLE NEW loan on your house that takes your current amount owed, adds whatever amount you want to turn into cash, and then operates like a normal loan at that larger combined amount. For example, let’s say you owe $250,000 on your house, and it’s worth $500,000. You really want money to do a major remodel to add a primary suite with a cool hot tub. With a cash out refinance, you can get a new mortgage for $350,000 which replaces the initial $250,000 AND gives you $100,000 in tax free money to spend on your remodel. Obviously, it’s likely your new house payment will be higher than it was before to account for the larger repayment balance, but a cash out refinance can be a simple way to obtain a large amount of cash with a long repayment schedule (30 years, compared to 10 or 20 for a HELOC or HELOAN).

PROS: Offers a fixed rate; longer amortization schedule (30 years) can mean lower monthly payments than a HELOAN.
CONS: More expensive and can take a couple weeks longer to obtain than a HELOC or HELOAN.

4. Roll it Over

Some owners might choose to take advantage of IRS tax law and roll over their equity into a new home purchase - with tax free profits. By selling a home for way more than you paid for it, those “gains” (sale profits above and beyond your initial purchase price) are typically tax free if you have lived in that home for two of the past five years and the gains are $250,000 or less for a single tax filer or $500,000 or less for a married couple filing jointly. This “roll it over” process is a way that many Americans move from their first home into their forever home.

PROS: Avoid paying interest on borrowed money; profits are tax free; allows you to monetize all your equity (as opposed to 80% for a HELOC or HELOAN).
CONS: Requires selling your home.

5. Reverse Mortgage

A reverse mortgage is a financial arrangement that allows a homeowner over age 62 to cash in their equity, either via installment payments or a lump sum. There are costs associated with doing this and occupant guidelines to meet regarding occupancy and starting equity percentages, so it might not always be an ideal Plan A, but it is a way for some people to generate income late in life when their primary asset is their home. While the homeowner will no longer have a monthly mortgage payment, the homeowner must continue to live in the home and stay current on both property taxes and homeowner’s insurance to remain eligible. For full terms and details, speak with a qualified Reverse Mortgage professional and consider consulting a CPA or attorney.

PROS: Provides income and a way for a homeowner to stay in their home.
CONS: Fees can be costly; potentially eliminates all equity to be monetized at the time the home is sold.

BONUS. Do Nothing and enjoy living in a Paid-for House

When you live in a paid-for house, it can become much easier to save up the cash you previously spent on your monthly mortgage payment. You worked hard to get to this place. Enjoy it!

We hope this content serves you well as you seek to be savvy homeowners and make wise financial decisions for your future. If you'd like to chat further or are considering moving in the coming months or year, let's get a meeting scheduled today!

Josh & The RAGE Team

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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.