What’s the Cheapest Way to Access Home Equity When You Need It?

Several clients replied to our article on AIO Mortgages and asked what we think the best way to access their property’s equity. Here are the primary options available to homeowners who have a need to tap into the equity in their home. 

Sell your home and purchase something smaller — Given today’s market conditions, being forced to sell is the least attractive option. That’s because of closing costs on your current residence and the replacement. Further, interest rates are likely higher now than the rate on your existing mortgage so your loan payments will increase.

Home Equity Sharing Companies — Home Equity Sharing Companies allow homeowners to access a portion of their equity in exchange for a portion of their future equity.  You will get a lump sum payment that you can use without taking on any additional debt or monthly payments. In return, the investing company gets a percentage of the future value of their home.

• Since it’s not a form of debt, the eligibility requirements are more lenient than with a traditional lender. 

• If the home depreciates in value, the Home Equity Sharing company shares the depreciation.

• We have a list of several top Home Equity Share companies. Call or text me at 626-825-5599 and I will send you the list we have.

Refinance — Given today’s rates, taking a home equity loan (above)  is usually much less expensive than doing a full refinance, especially if your existing mortgage is below five percent and especially if rates continue to rise. 

Refinancing vs. reverse mortgage for people age 62+ — While the reverse mortgage has the benefit of no payments, the interest cost over 20 years is more than double the interest you would pay using a traditional refinance. Unfortunately, many seniors are unable to qualify for a traditional refinance loan due having fixed incomes and/or increased payments.

All-in-One Mortgage (AIO) — In a recent email “Do you want to pay off your 30-year mortgage in 12 years?”, I described how an AIO combines a mortgage and credit line with the easy access of a checking account.

The beauty of using an AIO is that any money you have in your account is applied to your principal loan balance and then the simple interest due on the loan is calculated. AIOs are a type of Home Equity Line of Credit (HELOC.) When using a HELOC, you must take out all the money you will borrow when the loan closes. In contrast, AIOs allow the borrower to take out just what they need at any given point. This means the borrower is paying interest on a much smaller amount. These two factors allow you to pay off your loan much faster as compared to obtaining an amortized loan. Moreover, if there is an emergency, one can easily tap into their equity by merely writing a check. AIOs are for those who have credit scores of at least 700 and who are extremely disciplined about using the AIO to build wealth—not making withdrawals to spend on vacations, luxuries, etc.

The bottom line — The most expensive options for tapping into your equity are 1] selling and downsizing, 2] the traditional refinance, and the costliest decision, 3]obtaining a negatively amortizing HELOC. The least expensive option is the All-in-One Mortgage. While an AIO is may often be the best option to tap into your equity, they are harder to get. For those not eligible for an AIO, looking into a Home Equity Sharing company is the next most viable option.