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    How To Access Home Equity Without A Loan At All

    Access Home Equity Without A Loan

    As unemployment rises and health care costs increase, more people are looking for ways to tap into their home equity. Furthermore, many people are curious about the different financing options they’ve at their disposal without having to go into debt. 

    Keep reading to learn if it’s possible for people to tap into their equity without a loan.

    What Is Equity

    Equity refers to the stake of ownership one has in their home. For example, most mortgage lenders will require the borrower to come up with a down payment of at least 20%. Once they’ve qualified and made the down payment, the buyer is said to have a 20% stake in their property.

    As borrowers pay off more of the principal, their ownership stake in the property grows. A borrower who has paid off 80% of their mortgage would have an 80% ownership stake in their home.

    How To Tap Into Home Equity

    Those who are undergoing some financial hardship or require some extra cash often decide to tap into their houses’ value as a solution. Equity-based debt is a low-risk type of loan secured by the property. Thus, it comes with significantly lower interest rates than an unsecured debt, such as a personal loan or line of credit.

    Below are some of the most common types of debt vehicles that homeowners seek out when deciding to use the accumulated value in their properties.

    Shared Equity Agreement

    These agreements, otherwise known as home equity investments, have become popular with borrowers who want to access their property’s value without going into debt. 

    The premise is relatively simple: there are no interest rates or monthly payments. Instead, the homeowner sells a portion of their house’s future value to an investor. The investment agreement typically runs 10 to 30 years. Once this duration concludes, the homeowner is expected to sell the property and return the investor’s initial capital plus a portion of the property's appreciation.

    The one catch to this agreement is that even though it doesn’t increase an individual's debt load, they must pay back the sum at the end of the contract. In most cases, this means selling their home. Furthermore, the amount of money one can receive through this agreement is less than what other equity-based loans offer. Hence, many people find traditional loan methods of accessing one's accumulated property value to be preferable.

    Second Mortgage

    Often referred to as a home equity loan, a second mortgage allows homeowners to borrow agains their houses’ worth. These are typically fixed-rate mortgages and, more often than not, will carry a higher interest rate than the original loan. Terms may be as short as five years or as long as 15 years.

    Home Equity Line Of Credit

    A home equity line of credit (HELOC) is similar to a second mortgage but functions as a revolving line of credit instead of a lump sum payment. HELOCs are generally seen as more flexible than second mortgages because one can draw from them as much, or as little, as they require. Additionally, borrowers are only charged interest on the amount that they draw.

    Cash-Out Refinancing

    Unlike the previous two loan types we have discussed, a cash-out refinancing doesn’t involve taking out a second loan. Instead, homeowners refinance their mortgages for an amount greater than what they currently owe. This allows them to keep the cash difference between the two loans.

    For example, say a couple owns a $400,000 house, on which they still owe $150,000. This means they have built up $250,000 worth of value in their home that they can tap into. If they required an extra $45,000 for renovations or medical expenses, they could refinance their mortgage for a total of $195,000, which would allow them to keep $45,000 in cash.

    The Bottom Line

    Homeowners looking to make use of the value they’ve built up without taking out a loan may consider participating in a shared equity agreement. Even though this investment contract may not increase one's debt load, it’s not for everyone.

    Those who are after higher amounts of cash or don’t want to sell their property when the agreement is over should consider one of the other traditional equity-based loans.