Comparing the Options for Accessing Home Equity  

Key takeaways

• A home equity agreement is a way to access your home equity without monthly payments. Qualification is based on a different part of your financial profile than options like a home equity loan, home equity line of credit, cash-out refinance or reverse mortgage. 

• Before making any decisions on accessing your home equity, it’s critical to understand how the options differ and the qualifications for each. 

Home equity can be a tricky thing. You own it, but you can’t access it as readily as you can cash or money in a bank account. But there are several ways you can access that home equity, converting it to cash to make needed purchases or pay expenses. 

You’re probably familiar with some of those ways: a home equity loan, a home equity line of credit, cash-out refinancing and a reverse mortgage. But you may not be as familiar with a home equity agreement (HEA). Here’s a quick summary of the HEA – and how it compares to the other options to access home equity. 

Options to access home equity 

• Home equity agreement (HEA): The HEA provides a way to access your home equity without taking on monthly payments. HEAs give homeowners cash up front in exchange for a portion of their home’s value when they end the agreement. With Unlock’s HEA, you can buy back your equity at any time during the 10-year agreement term. For many people, that happens when they sell their home or by leveraging another form of financing.

• Home equity loan (HEL): A home equity loan is just that – a loan. Homeowners receive the total amount of the loan up front. An HEL has a fixed interest rate that will not change over the life of the loan.  

• Home equity line of credit (HELOC): A traditional HELOC acts like a credit card in that a homeowner can draw from it as needed (up to the limit extended), then repay the amount withdrawn. Interest is typically variable, although some fixed-rate HELOCs exist. Borrowers pay interest compounded only on the amount drawn, not the total equity available in the credit line extended.  

• Cash-out refinancing: This involves taking out a new mortgage, usually for an amount greater than the remaining principal on your existing mortgage. You pay off the existing mortgage and then take the balance in cash (the “cash out”) at closing, trading in your initial interest rate for today’s rates. You then make payments on the new mortgage every month.

• Reverse mortgage: In a reverse mortgage, a homeowner borrows money against the value of their home. They can receive the funding as a lump sum, fixed monthly payments or as a rolling line of credit. A reverse mortgage doesn’t require any monthly payments. Instead, the loan becomes due when a homeowner passes, sells their home or moves away for more than a year. A lender may also take possession of the home if the homeowner falls behind on property taxes or insurance payments or lets the home fall into disrepair.  
   

Qualifying for home equity options: Terms to know 

If you are looking at one of these options to access your home equity, you must qualify based on several factors. Typically, these include: 

• Credit score – A number calculated by any of several credit reporting agencies that predicts how likely you are to repay a loan on time. It is also often used as an indication of how financially responsible you are overall. The information that appears in your credit reports is used to calculate the scores. 

• Debt-to-income ratio (DTI) – The percentage of your monthly gross income that goes to monthly payments on debts. 

• Loan-to-value ratio (LTV) – The amount of your mortgage (and any other debts you have on your home) divided by your home’s assessed value. Loans with lower LTVs are considered to have lower risk.  
   

Qualifying: Comparing the options 

Unlock HEA 

An HEA has a different qualification threshold than the traditional ways to access your home equity, because the agreement doesn’t require you to make monthly payments.

• Minimum credit score: Scores can start at 500 with Unlock. 
• Loan-to-value ratio: Unlock requires an LTV ratio of no higher than 80%.  
• Debt-to-income ratio: Unlock’s HEA is available to retirees and self-employed individuals and doesn’t have debt-to-income ratio requirements that products with a monthly payment do.

HEL 

Qualification is based on a homeowner’s credit profile, DTI ratio and LTV ratio. Every lender will be different, but typical criteria include: 

• Minimum credit score: The required minimum credit score for an HEL is usually 620, although you’ll need at least 700-740 to get a good rate.  
• Debt-to-income ratio: HEL lenders generally look for a DTI ratio of no higher than 43%. This also means that lenders usually need to see steady income, even for borrowers with a great deal of equity in their homes. This can present a problem for someone who is retired. 
• Loan-to-value ratio: HEL lenders also generally want to see an LTV ratio of no higher than 80-85%.  

HELOC 

Like an HEL, qualification is based on a homeowner’s credit profile, DTI ratio and LTV ratio. Every lender will be different, but typical criteria include: 

• Minimum credit score: The required minimum credit score for an HELOC is usually 620, although you’ll need at least 700-740 to get a good rate.  
• Debt-to-income ratio: HELOC lenders generally look for a DTI ratio of no higher than 43%. This also means that lenders do usually need to see steady income, even for borrowers with a great deal of equity in their homes. This can present a problem for someone who is retired. 
• Loan-to-value ratio:HEL lenders also generally want to see an LTV ratio of no higher than 80-85%.  

Cash-out refinance 

Since a cash-out refinance involves getting a new first mortgage, you can expect qualifications similar to any mortgage. Again, every lender will be different, but typical criteria include: 

• Minimum credit score: The typical required minimum credit score for a cash-out refinance is 620, although you’ll need at least 700-740 to get the best rates.  
• Debt-to-income ratio: Lenders generally look for a DTI ratio of no higher than 43%. This also means that lenders do usually need to see steady income, even for borrowers with a great deal of equity in their homes. As with a HEL or HELOC, this can present a problem for someone who is retired. 
• Loan-to-value ratio: Lenders also generally want to see an LTV ratio of no higher than 80%.  

Reverse mortgage 

Some reverse mortgages have fixed rates while others have variable rates, but there aren’t income or DTI requirements. In addition, homeowners must complete a federally approved counseling session, which comes with a nominal cost.  

• Age: You must be 62 or over.  
• Home ownership: You must own your home in full (no mortgage balance) or have very little left to pay. If you’re in the latter category, the balance must be small enough that you can pay it off when you close on the reverse mortgage. 

Take the next step 

Tapping your home equity can be a great solution when you need cash for needed purchases and to pay off debt and take care of other expenses. Understanding your options will help you decide on the best financial path for you and your situation. If you are interested in learning how much equity you could tap from your home with an Unlock HEA, take the next step now.