How to Get Money Out of Your Home

Your home is more than just a place to live; it’s a significant financial asset. As mortgage payments are made and property values appreciate, a portion of your home’s value becomes accessible equity. This accumulated equity can be a valuable resource, offering a way to obtain funds for various financial needs without selling your property.

Understanding Home Equity and Key Concepts

Home equity is the portion of your home’s value you own outright. It is calculated as the current market value of your property minus any outstanding mortgage balances and other liens. For instance, if a home is valued at $400,000 with a $200,000 mortgage, the homeowner has $200,000 in equity.

Equity accumulates in two ways. First, as principal payments are made on the mortgage, the outstanding loan balance decreases, directly increasing equity. Second, if the home’s market value appreciates due to market conditions or improvements, equity also grows, assuming the mortgage balance remains the same or decreases.

The Loan-to-Value (LTV) ratio is a key concept in equity-based financing. This ratio compares the loan amount to the property’s appraised value, expressed as a percentage. To calculate LTV, divide the loan amount by the property’s appraised value and multiply by 100.

For example, a $160,000 loan on a $200,000 home results in an 80% LTV. Lenders use LTV to assess risk; lower LTVs indicate less risk and potentially more favorable loan terms.

Home Equity Line of Credit

A Home Equity Line of Credit (HELOC) is a revolving line of credit. It allows homeowners to borrow funds as needed, up to an approved limit, rather than receiving a single lump sum. Lender and borrower financial profiles determine terms and eligibility.

Lenders require a good to excellent credit score, often mid-600s or higher, with scores above 700 securing better terms. A debt-to-income (DTI) ratio, comparing monthly debt payments to gross monthly income, is also assessed. Lenders prefer a DTI below 43%, though some allow up to 50%. Borrowers need to maintain an LTV ratio of 80% or 85% after the HELOC.

Before applying, gather documents including:
Proof of income (recent pay stubs, W-2 forms for two years, or federal tax returns if self-employed)
Bank statements
Current mortgage statements
Homeowner’s insurance policy details
Personal identification (driver’s license, Social Security number)
Employment history

The application process begins with an inquiry and formal submission. A home appraisal determines the property’s current market value. The application then undergoes an underwriting review, where the lender assesses creditworthiness. Upon approval, closing procedures are completed, documents are signed, and associated fees (2% to 5% of the credit limit) are paid.

After closing, funds can be accessed via checks, debit cards, or online transfers. A HELOC has two phases: a “draw period,” lasting about 10 years, during which funds can be borrowed and repaid with interest-only payments. A “repayment period” then begins, where the remaining balance is amortized, requiring both principal and interest payments. The interest rate on a HELOC is variable.

Home Equity Loan

A Home Equity Loan provides a lump sum of money, repaid over a fixed period with regular installments. Unlike a line of credit, this loan provides all funds upfront, making it suitable for specific, one-time expenses.

Eligibility requirements include a credit score in the mid-600s, with 680 or higher preferred for better rates. Lenders review the borrower’s DTI ratio, seeking below 43%, though some accept up to 50%. Homeowners need at least 15% to 20% equity in their home.

To prepare for application, compile:
Proof of income (recent pay stubs, W-2 forms, or two years of tax returns if self-employed)
Bank statements
Recent mortgage statements
Valid homeowner’s insurance policy details
Personal identification (Social Security number, government-issued photo ID)

The application process starts with a pre-application inquiry, followed by formal submission with all documentation. A home appraisal establishes the property’s current market value. The application then moves to underwriting, where the lender assesses risk and verifies information.

Upon approval, closing procedures involve signing loan documents and paying closing costs (2% to 5% of the loan amount). After closing, approved funds are disbursed as a single lump sum. Repayment involves fixed monthly payments with a fixed interest rate, providing predictable budgeting.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new, larger one, allowing you to receive the difference in cash. The original mortgage is paid off, and the new, larger loan becomes your sole mortgage.

Eligibility requires a credit score of at least 620, though higher scores lead to better interest rates. Lenders prefer a DTI ratio of 43% or less to ensure the borrower can manage the new payment. A significant amount of home equity is also required, with most lenders stipulating an LTV ratio of 80% or less after the refinance.

Before applying, prepare:
Recent pay stubs and W-2 forms or two years of tax returns for income verification
Bank statements
Property appraisal details
Current mortgage statements
Valid homeowner’s insurance policy
Personal identification

The application process begins with an inquiry and formal submission. A home appraisal determines the property’s current market value. The application then proceeds to underwriting, where the lender reviews financial information and assesses risk. After approval, closing involves signing documents, and the existing mortgage is paid off from the new loan’s proceeds.

After settling the old mortgage and closing costs, remaining funds are disbursed as a lump sum. Repayment is structured as a new primary mortgage, with either a fixed or adjustable interest rate and monthly payments over a new loan term.

Reverse Mortgage

A reverse mortgage is a specialized loan for homeowners aged 62 or older, allowing them to convert a portion of their home equity into accessible funds. Unlike traditional mortgages, borrowers do not make monthly payments. The loan becomes due upon a qualifying event, such as moving out, selling the home, or passing away. This structure allows seniors to access home value while retaining ownership.

Eligibility criteria include being 62 or older, owning the home outright or having substantial equity, and occupying the property as a primary residence. A mandatory counseling session with a HUD-approved counselor is also required.

For the application, gather:
Proof of age (government-issued ID)
Home ownership documents (deed)
Certificate from the mandatory counseling session
Financial information (bank statements, income details, current mortgage statements)

The application process begins with the mandatory counseling session, followed by formal submission. A home appraisal determines the property’s value, influencing the loan amount. The application then undergoes a manual underwriting review, verifying information and ensuring eligibility.

Upon approval and closing, funds can be received in several ways:
A single lump sum
Regular monthly payments
A line of credit
A combination of these options

A key feature is their non-recourse nature: the borrower or heirs will not owe more than the home’s value at repayment. The loan is repaid from the home’s sale or other assets when a qualifying event occurs.