If you need to get equity out of your house but you're not ready to sell, you have other options for accessing that cash. Different loan options offer you lines of credit, monthly payments or lump sums for the equity in your house. To qualify, you need to have a good credit score, a sufficient loan-to-value ratio and a low enough debt-to-income ratio.
Homeowners With No Mortgage
If you've paid off your mortgage completely, apply for a home equity loan and gain access to a lump sum when your loan closes. A home equity loan operates similarly to a mortgage; you'll make monthly loan payments until the debt is paid off. Alternatively, homeowners 62 or older may consider a reverse mortgage. In a reverse mortgage, the lender makes loan payments to you for a period of time. When you die or sell your home, you or your estate repays the loan.
Homeowners With an Existing Mortgage
Homeowners who still have a balance left on their mortgage can consider a cash-out refinance. With a cash-out refinance, you refinance your loan for more than the current loan balance and pocket the difference. For example, if you have $5,000 left on your mortgage, you can refinance for $7,000 and have immediate access to $2,000.
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Lines of Credit
Rather than replacing your existing mortgage, home equity line of credits are taken out in addition to any mortgage you already have. These loans give you access to a line of credit for 10 years or so, then a repayment period begins.
Criteria For Loans
Bankrate notes that there are three main criteria to qualify for one of these home equity loans. First, you must have a high enough credit score to qualify for the loan. Aim for a score of at least 700 to be sure you'll qualify. Second, you must have sufficient equity in your house. For most lenders, you must have a loan-to-value ratio of at least 85 percent after you take out the loan. Lastly, you need a low enough debt-to-income ratio to ensure you can pay back the balance. A debt-to-income ratio lower than 36 percent is ideal.
Taking Out a Loan
The process for taking out one of these loans is similar to taking out a mortgage. Nolo recommends that homeowners either use a mortgage broker or shop around for loans themselves. A low interest rate is important as are low fees and closing costs. Bank of America notes that cash-out refinances tend to have higher closing costs, whereas home equity loans and lines of credit have comparatively low fees.