How to Settle Your HEA with a Cash-Out Refinance  

Key takeaways 

• Using funds from a cash-out refinance is an option for some homeowners to settle their Unlock home equity agreement (HEA). 

• Homeowners who have used their HEA funds to pay off credit card or other debt, and improve their financial position, may now be in a position to qualify for a cash-out refinance at a good rate. 

If you have a home equity agreement (HEA), you know it’s not a loan, and you know there are no monthly payments to make. You probably also know that you will eventually need to buy back your equity, or “settle,” with your HEA provider before your HEA term runs out. With Unlock, that’s 10 years.  

Homeowners who have HEAs often settle when they sell their home. But you can also buy back your equity through an owner buyout. Each HEA provider has its own policy on this, but with an Unlock HEA, you can do this at any time during the 10-year term, in full or with multiple partial payments. This allows you to end your HEA without selling your home. 

The cash-out refinance option

This begs the question of where to find the funds to complete the transaction. Some homeowners can obtain a home equity loan or home equity line of credit and use those funds to buy back their equity. Another option for some is to complete a cash-out refinance, also known as a cash-out refi. 

A cash-out refinance involves taking out a whole new mortgage on your home. The new mortgage would be for an amount more than what you owe on your home. With the proceeds, you would pay off your existing mortgage, and with the difference – the “cash out” – you would buy back your equity and end your HEA.  

Qualification

You’ll need to qualify for a cash-out refi just as you would for a first mortgage. The process, paperwork and documentation requirements are the same as when getting a first mortgage. Qualification is based on your credit, your debt-to-income (DTI) ratio and your home’s loan-to-value (LTV) ratio.  

• Credit. Each lender differs in its criteria, but most will require a credit score 620 or higher. Many require scores of 680 or higher, and no matter what the requirement is, the lowest interest rates will go to those with the highest credit scores. 

• DTI. This ratio compares your income with the amount of debt payments you have. To determine your DTI ratio, divide your total monthly debt payments (including what your new mortgage payment will be) by your gross monthly income. Multiple by 100 to get a percent. Again, every lender is different, but most look for a DTI ratio of 43% or lower. Lenders will also need verification of income as they evaluate DTI. 

• LTV. To figure out your LTV ratio, divide the amount of your loan balance (what it would be with the new mortgage you obtain with the cash-out refinance) by your home’s market value. Multiply by 100 to get a percent. Lenders usually require an LTV of 80% or less. 

As with any financial decision, there are pros and cons to consider with a cash-out refinance. 

Pros

• You receive cash in a lump sum. The amount you can obtain will depend on the market value of your home, what you still owe on your home, and the lender. You can use the cash you receive to buy back your equity from Unlock and end your HEA. 

• You may have some flexibility in setting terms. You can determine the new mortgage’s length (e.g., 30 years, 15 years, etc.). Different terms will offer different interest rates. Be aware if you extend your loan term, you may be increasing the total amount of interest you pay over the life of the loan.  

Cons

• You must be able to qualify. As explained, you must meet a lender’s criteria with your credit, DTI ratio and LTV ratio. 

• You will have closing costs. Just as with a first mortgage, you’ll have closing costs with a cash-out refi. These costs can add up to between 2% and 5% of the loan amount. 

• Your monthly payment could increase. Since a cash-out refinance replaces your existing mortgage with a new one for a larger amount, it’s possible that the monthly payment will be higher than your current payment – even if the interest rate has decreased. You’ll need to make sure that your budget can comfortably accommodate the payments of the new mortgage. 

• Your home serves as collateral. You are borrowing using the equity in your home. A cash-out refinance uses your home as collateral. If you can’t make your payments, you face a risk of foreclosure and losing your home.  

When settling an HEA with a cash-out refinance may be a good idea – and when it might not

Many homeowners obtained an HEA because of the flexible qualification criteria and the lack of monthly debt payments. With the funds they received, many have been able to pay off debts, move their finances forward and begun to see their credit scores rise. They may now be able to qualify for a traditional loan, such as a cash-out refinance, at a competitive rate. 

In evaluating options, homeowners will also need to consider some other market economic factors, such as interest rates. It’s common for homeowners to consider a cash-out refinance when mortgage interest rates fall – a few points or more – below the rate they have on their existing mortgage.  

In today’s market, you’ll want to evaluate this carefully. Mortgage rates are significantly higher than they were several years ago. If you were able to secure an ultra-low rate at that time, it probably does not make sense to give that up for a higher rate. On the other hand, if you bought a home more recently – at a high rate – a cash-out refi might be a favorable option.  

The equity buy-back process

When you are ready to buy back your equity from Unlock – in full or in part – a few things take place. 

• Request. If you are interested in buying back your equity in your Unlock HEA through a cash-out refinance, the first step will be to contact Unlock and make the request. Since the cash-out refi process can take a month or two, it’s important to do this at least 45 days in advance of your anticipated closing date.  

• Unlock Share. To determine how much you’ll pay to Unlock, you can consult your account dashboard or contact our Customer Success team. 

• Determination of home improvement value. As a partner in homeownership, Unlock designed its HEA to be supportive of home improvements, so we do not share in value created by improvements you’ve made at your expense. If you have made substantial home improvements, you can apply to Unlock for an improvement adjustment.  

• Appraisal. Conducted by an independent appraiser in your state, the appraisal will provide the basis for your “ending home value.” Unlock will then subtract the improvement adjustment, if any, from the appraisal number.    

• Property inspection. If the appraisal indicates major concerns about the property’s condition, Unlock may require an independent property inspection. If warranted, a maintenance adjustment will be applied for the cost of necessary repairs. Just as home improvements can reduce your ending home value, a maintenance adjustment can increase it. 

By taking the ending home value, subtracting the value of improvements and adding in any needed maintenance adjustment, we arrive at the amount on which we’ll receive our percentage share, as specified in your agreement. 

• Settlement statement. Unlock will provide you – and your lender’s escrow company upon request – a settlement statement, payoff request and documents needed to release its lien on the property. 

• Closing. The escrow company will pay Unlock its share of proceeds, ending the HEA.  

Making the cash-out refi call

The good news is that Unlock homeowners don’t necessarily have to wait until they sell their homes to settle their HEAs. One option is to buy back their equity through funds generated from a cash-out refinance. If you are thinking about this option, it’s critical to review the pros and cons, carefully evaluate interest rates and fully understand the process.