How to Take Money Out of Your House: 4 Options

Accessing home equity allows homeowners to convert a portion of their property’s worth into usable cash without selling the residence. Homeowners often use these funds for significant home improvements, debt consolidation, or unexpected expenses. The home serves as collateral for these financial products. Each method for extracting home equity carries distinct features and requirements. Understanding these differences is important for making an informed decision that aligns with individual circumstances and long-term financial goals.

Cash-Out Refinancing

Cash-out refinancing involves replacing an existing mortgage with a new, larger home loan. Homeowners receive the difference between the new loan and the old mortgage balance in cash.

Eligibility typically requires substantial equity, often at least 20% of the home’s appraised value. Lenders generally limit the new loan amount to around 80% of the home’s current value. A credit score of at least 620 is beneficial, with higher scores often leading to more favorable interest rates. Lenders also evaluate the debt-to-income (DTI) ratio, typically preferring 43% or less.

Required documents include recent pay stubs, tax returns, bank statements, and current mortgage statements. An appraisal determines the home’s current market value. Closing costs, typically 2% to 6% of the new loan, can include origination, appraisal, and title insurance fees.

The application process begins with comparing offers from multiple lenders. After selecting a lender, submit a complete application package with all necessary documentation. Underwriting involves reviewing financial information and ordering a home appraisal. Upon approval, closing involves signing the new mortgage agreement. The existing mortgage is paid off, and cash proceeds are disbursed to the homeowner.

Home Equity Loans

A home equity loan functions as a second mortgage, allowing homeowners to borrow a fixed amount of money using their home’s equity as collateral. It provides a lump sum disbursement at closing, repaid over a predetermined period with fixed monthly payments and a fixed interest rate. Unlike a cash-out refinance, a home equity loan does not replace the primary mortgage but exists as a separate loan.

Eligibility often includes a credit score of 680 or higher, though some lenders may approve scores as low as 660. Lenders typically require 15% to 20% equity in the home. The debt-to-income (DTI) ratio is also important, with most lenders requiring it to be 43% or lower, though some may allow up to 50%. Documentation includes proof of income, asset statements, and identification. The fixed interest rate ensures predictable monthly payments over the 5 to 30-year term, aiding budgeting.

To apply, begin by researching and comparing offers from various lenders. After selecting a lender, submit a formal application with all required financial documents. The lender then proceeds with an underwriting process, which includes a valuation of the home to confirm its market value and available equity. Upon approval, closing involves signing the necessary loan documents. The lump sum is then disbursed to the homeowner, suitable for one-time, large expenses.

Home Equity Lines of Credit

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by home equity, similar to a credit card. Homeowners can borrow funds as needed, up to a pre-approved limit, rather than receiving a single lump sum. The interest rate on a HELOC is typically variable, fluctuating based on a benchmark index like the Wall Street Journal Prime Rate.

HELOCs typically involve two distinct phases: a draw period and a repayment period. During the 5 to 10-year draw period, homeowners can access funds as needed and often make interest-only payments. The repayment period, typically 10 to 20 years, requires principal and interest payments.

Eligibility generally requires a credit score of 680 or higher. Homeowners need sufficient equity, with many lenders allowing borrowing up to 80% to 85% of the home’s appraised value, minus the existing mortgage. The debt-to-income (DTI) ratio is also assessed, typically 43% or less, though some allow up to 50%. Standard documentation, including income and asset statements, is required.

The application process involves selecting a lender and submitting a detailed application with financial documentation. The lender conducts an underwriting review and orders a property valuation to determine the available equity and the credit limit. After approval, funds can be accessed during the draw period via checks, debit card, or online transfers. During the draw period, minimum monthly payments are often interest-only, providing flexibility. Once the repayment period begins, payments include both principal and interest, resulting in higher monthly payments. Planning for this increase is important.

Reverse Mortgages

A reverse mortgage is for homeowners aged 62 or older, allowing them to convert a portion of their home equity into cash. Homeowners receive funds without needing to make monthly mortgage payments. The loan becomes due when the last borrower permanently leaves the home.

This tool is primarily for older adults who own their homes outright or have significant equity (at least 50%). The homeowner retains title, but the loan balance grows over time as interest and fees accrue. The loan is repaid from the home’s sale or other assets when it matures. It is non-recourse, meaning borrowers or heirs generally cannot owe more than the home’s value at repayment. However, homeowners remain responsible for ongoing property taxes, homeowners insurance, and home maintenance.

Eligibility for a reverse mortgage, like a Home Equity Conversion Mortgage (HECM), requires the youngest borrower to be at least 62. Some private reverse mortgage programs may have a lower minimum age, such as 55. A mandatory counseling session with a U.S. Department of Housing and Urban Development (HUD)-approved counselor is required for HECMs to ensure borrowers understand the terms. Required documents include proof of age, home ownership, and counseling completion.

The application process involves attending counseling, finding a lender, and submitting the application. An appraisal determines the amount that can be borrowed. Funds can be received as a lump sum, monthly payments, a line of credit, or a combination. The loan matures and becomes due when the homeowner no longer occupies the property as their primary residence, typically repaid through the home’s sale or by the borrower’s estate.