When you need cash relatively quickly, but don’t want to take out a personal loan, what options do you have? For many homeowners, the best solution is to turn to their home equity. Home equity is most homeowners’ most significant asset, and whether you’re looking to fund home improvements, consolidate debt, or cover unexpected expenses, accessing this equity can be a smart financial move.
That said, accessing your home equity isn’t always easy. From your income to your creditworthiness to the value of your home, there are numerous factors that complicate accessing home equity. On top of that, tapping your equity isn’t always the cheapest way to borrow due to closing costs, interest rates, and more.
However, as we said up top, your home equity is probably your most significant asset, and tapping into it could help you accomplish your financial goals, get out of debt, and pay off unexpected bills. So, how can you do that without breaking the bank? Here, we’ll explore five of the cheapest ways to get equity out of your house.
5. FHA Streamline Refinancing
FHA streamline refinancing isn’t necessarily an expensive way to tap your home’s equity, but it’s simply not your best option for tapping home equity. With an FHA streamline refinance, you can only cash out up to $500 from the refinancing process. And if you’re looking to tap into your equity, odds are that you need more than $500.
However, FHA streamline refinances do help you lower your monthly payments by a fair amount, which can free up a significant chunk of change over time. So, depending on how urgently you need cash, it may be worth considering. Plus, FHA streamline refinances tend to have slightly more lenient qualifying criteria.
FHA Streamline Refinance Requirements
- Your mortgage needs to be insured by the FHA
- You need to be up-to-date on all mortgage payments
Finally, note that credit score requirements for FHA streamline refinances can vary widely. That’s because there are two types of streamline refinances: credit qualifying and non-credit qualifying. Credit qualifying means your credit score needs to be checked. However, with non-credit qualifying, you may not need a credit check, but lenders can still impose their own credit score criteria. As a general rule, if your score is below 550, you might struggle to qualify for an FHA streamline refinance.
4. Cash-Out Refinancing
Cash-out refinancing replaces your existing mortgage with a new, larger loan. This enables you to access your equity—the difference between your existing mortgage and the new mortgage. Cash-out refinancing can be an affordable way to access your equity, but it depends on a few factors.
For example, your cash-out refinance’s interest rate should be equal to or lower than your original mortgage—something that’s not always possible. Plus, your ability to access a cash-out refi and your interest rate will depend on your credit score. Finally, the total cost of a cash-out refinance will depend on your closing costs, which can be as much as 5% of the loan. Interest rates, appraisal fees, and closing costs can quickly make it an expensive way to borrow.
Cash-Out Refinancing Requirements
- You’ll typically need a credit score of at least 620 for a cash-out refi
- You’ll usually need a debt-to-income (DTI) ratio of 43% or lower
- You need a stable income
- You need a strong payment history on your current mortgage
3. Home Equity Loans
Home equity loans, also known as second mortgages, allow you to borrow a lump sum against the equity you’ve built up in your home. So, how affordable are they? It depends on factors like the amount of equity you have, how much you’re taking out, and your credit score. That said, home equity loans tend to be a cheap way to get equity out of your home.
First off, home equity loans typically come with fixed interest rates. This makes your monthly payments predictable and easy to budget for. Additionally, interest on home equity loans may be tax-deductible if the funds are used for certain home improvements.
While home equity loans are one of the cheapest ways to access your home’s equity, they can be difficult to qualify.
Home Equity Loan Requirements
- Your credit score typically needs to be at least 620 or higher
- Your DTI needs to be below 43%
- You need a consistent income
- You typically need around at least 20% equity in your home
- Your loan-to-value ratio (the value of your mortgage and loan combined, compared to your home’s appraised value) should be less than 80%
- Your home will need to be appraised
2. Home Equity Lines of Credit (HELOCs)
Home equity lines of credit (HELOCs) are very similar to home equity loans. The most significant difference is that a HELOC is a revolving credit line, so you can borrow as much or as little as you need (to a certain extent, of course). This flexibility makes HELOCs popular choices for home improvement projects, as they allow you to spend as much or as little as the work needs.
HELOCs are usually a slightly cheaper way to access your home’s equity. HELOCs typically don’t have origination fees like home equity loans, and closing costs are typically a fraction of what you would see with a home equity loan.
That said, although they’re slightly cheaper than home equity loans, they’re usually just as difficult to qualify for as home equity loans.
HELOC Requirements
Requirements for HELOCs are essentially the same as the requirements for a home equity loan, although your credit score typically needs to be slightly higher for HELOCs, with many lenders requiring a minimum score of 680.
1. Sale-Leaseback Agreements
Sale-leaseback agreements like SKYDAN’s are the most affordable way to access your home’s equity. Plus, with SKYDAN’s sale-leaseback program, you could access your cash faster than with a HELOC or home equity loan, which can take as long as two months.
Here’s how SKYDAN’s program works:
- SKYDAN buys your home, but you don’t move out.
- You then agree to lease your home back from us. We set a mutually-agreed upon amount, not exceeding two years.
- Rent is deferred until the end of the agreement, so you have no monthly payments.
- Finally, at the end of the agreement, you have two options, so you’re never stuck.
- Purchase your home back at SKYDAN’s original purchase price plus deferred rent.
- You sell your home at its current market value and receive all additional equity.
Sale-Leaseback Requirements
There are far fewer requirements for SKYDAN’s residential sale-leaseback program than other ways to access your equity: all you need is equity in your home.
Outside of that, there are no credit score, income, or debt-to-income ratio requirements, making it vastly more accessible than a HELOC or home equity loan.
Final Tips for Keeping Costs Low
Choosing the right way to access your home’s equity is essential for making the most affordable decision. The cheapest way to access your home’s equity will ultimately depend on your own unique financial circumstances. If your credit score is strong and you have a consistent income, a home equity loan or HELOC might be a good option. But, if your credit score has taken a hit, or your income isn’t as stable as you’d like, you might do well to explore new options for accessing your home’s equity, like through SKYDAN’s sale-leaseback program.
To learn more about SKYDAN or see if you qualify (for free—no credit check required!), get started today.