Comparing the Options for Accessing Home Equity  

Key takeaways 

• A home equity agreement is a no-loan option to access your home equity. Qualification criteria are much more flexible than with loan 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 out a loan. HEAs allow homeowners to receive cash up front in exchange for a portion of the future value of their home. 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.  

• 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 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like a credit card in that a homeowner can draw from it as needed (up to the limit extended), then repay the amount withdrawn. Like an HEL, it’s a loan. 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. 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 dies, 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 loan 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 

Because an HEA is not a loan, it has a lower qualification threshold than any of the loan options available to access your home equity.  

• Minimum credit score: Scores can be as low as 500 with Unlock. 

• Debt-to-income ratio: 45% (*After funding. Homeowners can use proceeds from an HEA to reach this DTI) 

• Loan-to-value ratio: Unlock requires an LTV ratio of no higher than 80%.  

• Income: Flexible. Unlock’s HEA is available to retirees and self-employed individuals.  

• Understanding your risk: Homeowners continue to live and maintain their home as usual. They pay property taxes and insurance and make any mortgage payments if they still have a mortgage on their home. 

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%.  

• Understanding your risk: If you’re considering an HEL, remember that it is a loan that uses your home as collateral. If you can’t keep up with payments, you could face foreclosure. 

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%.  

• Understanding your risk: Like an HEL, a HELOC is a loan that uses your home as collateral. If you can’t keep up with payments, you could face foreclosure. Another risk is the potential for a balloon payment – the repayment of the entire balance at the end of the repayment period – if the lender offers the option of interest-only payments, Also, some lenders assess penalties if you don’t borrow a minimum amount in designated periods of time or maintain a minimum outstanding amount. 

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%.  

• Understanding your risk: A cash-out refinance comes with closing costs that can be high. Also, if the refinancing allows home equity to dip below 20%, the homeowner may need to pay private mortgage insurance. Cash-out refinancing usually makes most sense when a homeowner can obtain an interest rate on the new mortgage that is lower than the existing one. For the many, many homeowners who were able to obtain the exceptionally low interest rates available in the early 2020s, a cash-out refinance may not make sense unless rates fall to similar levels. 

Reverse mortgage 

Some reverse mortgages have fixed rates while others have variable rates. In addition, homeowners must complete a federally approved counseling session, which comes with a nominal cost.  

• Age: You must be 62 or over.  

• Minimum credit score: N/A 

• Debt-to-income ratio: N/A 

• 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. 

• Understanding your risk: Closing costs can be higher than those of traditional mortgages, and there are also origination fees, loan servicing fees, monthly mortgage insurance premiums and an upfront mortgage insurance premium. 

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.