How to Turn Home Equity Into Cash

The Main Ways to Access Home Equity

Five paths exist, and none is free of cost or tradeoff.

• Home equity loan. A lump sum, borrowed against the home and repaid in installments.
• Home equity line of credit (HELOC). A credit line to draw on over time, also repaid.
• Cash-out refinance. A new, larger mortgage that replaces the current one, with the difference paid out in cash.
• Reverse mortgage. A loan for older homeowners with no monthly loan payment, where the balance grows instead. The federally insured version is the HECM.
• Selling or downsizing. Selling turns all of the equity into cash at once, but it means leaving the home.

The tradeoff is the common thread. Borrowing now usually means taking on a new debt with payments. With a reverse mortgage, the cost shows up differently: the equity left later gets smaller.

Which paths are open, and which are practical, depends on the homeowner's age, income, credit, existing mortgage balance and goals.

Home Equity Loan: One Lump Sum for One Clear Need

For someone with one clear expense, such as a roof or a medical bill, a single payment can be appealing. The Consumer Financial Protection Bureau describes a home equity loan as money borrowed using the home's equity as collateral, paid out as a lump sum. Collateral means property pledged to secure a loan. If the owner already has a mortgage, the CFPB notes, the home equity loan is a second mortgage, paid in addition to the first.

The loan is repaid in monthly installments over a set term. It usually has a fixed interest rate, one that does not change, so payments stay predictable. The Federal Trade Commission notes that home equity loans typically have a fixed annual percentage rate, which includes interest and other credit costs.

The home is on the line. The CFPB states that if the borrower cannot pay back the loan, the lender could foreclose on the home. The CFPB also notes that home equity loans may have upfront fees and costs.

A lender decides whether the borrower qualifies, based on income, credit and available equity. The tradeoff: cash now, a new monthly payment, and less equity.

Home Equity Line of Credit (HELOC): Flexible Access Over Time

Some needs arrive in pieces, like in-home care month to month or repairs spread over a year. A HELOC is built for that pattern. The CFPB describes a HELOC as an "open-end" line of credit for borrowing repeatedly against home equity. It works somewhat like a credit card, except the home secures it. As payments are made, available credit is replenished.

A HELOC has two stages. During the draw period, the borrower can borrow up to the credit limit; the CFPB says it could last 10 years, for example. The FTC notes that during the draw period, the borrower may only have to pay interest. In the repayment period that follows, no more borrowing is allowed, and the balance must be repaid, either all at once or through payments over time.

HELOCs usually carry a variable rate, meaning the interest rate can rise or fall, so payments may change from month to month. The CFPB adds that a lender might freeze the line if the home's value drops significantly or the borrower's finances change. If the line is not repaid as agreed, the FTC states, the lender can foreclose.

The tradeoff: flexibility to borrow only what is needed, but payments that can climb and a home at risk if they cannot be met. The differences between this path and a reverse mortgage are laid out in reverse mortgage vs HELOC.

For needs that arrive gradually rather than all at once, this path works differently from a lump-sum loan.

Cash-Out Refinance: Replacing the Mortgage for a Larger One

A cash-out refinance works differently from a second loan. The existing mortgage is paid off and replaced with a new, larger mortgage. The difference between the new loan amount and the old balance goes to the homeowner as cash.

The catch is time. A new mortgage starts a new term, which can mean paying interest for more years, even for a homeowner who was close to finishing the original loan. Closing costs apply, much as they did on the first mortgage.

The home remains collateral, and the borrower must qualify with the lender on income and credit. The tradeoff: access to a potentially large sum, but often a larger monthly payment and a loan term that starts over.

Reverse Mortgage: Staying Home Without a Monthly Payment

The idea of no monthly loan payment draws attention, and advertising sometimes stretches it. A reverse mortgage is a loan, not income or a benefit. The CFPB explains that a reverse mortgage lets a homeowner borrow against the home without monthly mortgage payments, while the title stays in the owner's name.

HUD describes the Home Equity Conversion Mortgage (HECM) as the only reverse mortgage insured by the federal government, available only through a Federal Housing Administration (FHA)-approved lender. Federal law, 12 U.S.C. § 1715z-20(d), requires the borrower to qualify as an "elderly homeowner." Section 1715z-20(b) defines that term as "any homeowner who is, or whose spouse is, at least 62 years of age or such higher age as the Secretary may prescribe."

Four conditions come with every HECM. First, the CFPB states, interest and fees are added to the balance each month, so the amount owed grows. Second, the borrower must live in the home as a principal residence, which the CFPB defines as where the borrower lives the majority of the year. Third, the borrower must pay property taxes and homeowners insurance and keep the house in good condition. Fourth, the FTC explains that the loan is generally repaid when the borrower dies, sells the home or moves out. The CFPB says a HECM comes due when the last surviving borrower or eligible non-borrowing spouse dies or no longer lives there. It may come due sooner if taxes, insurance or upkeep fall behind, and the CFPB warns of possible foreclosure if money for those costs runs out.

Counseling comes first. Section 1715z-20(d) requires counseling from an independent third party, and the CFPB says it comes from a HUD-approved reverse mortgage counseling agency.

The statute lets the borrower choose how a lender may pay out funds: a line of credit, monthly payments over a chosen term, monthly payments for as long as the borrower lives there, combinations of these with a line of credit, or another basis HUD approves. HUD publishes the current HECM FHA mortgage limit. Federal rules limit the origination fee, and the lender discloses it. More detail on how the loan works appears in what a reverse mortgage is.

A reverse mortgage is one option among several, not the answer to every situation.

What Each Option Involves: A Plain-Language Comparison

Seeing the options side by side can make the differences easier to hold. The table below is a general summary, not a promise of any loan's terms.

For heirs, the reverse mortgage line deserves a closer look. The CFPB notes that heirs often sell the home to pay off the loan, but neither the borrower nor the heirs will have to pay back more than the home is worth. The FTC calls this a "non-recourse" clause.

Selling or downsizing deserves equal standing. It turns equity into cash without new debt, and the CFPB notes that moving to a more affordable home can reduce overall expenses.

Questions Worth Thinking Through Before Accessing Equity

Behind the products sits a more personal question: what does this household actually need? These questions can help bring that into focus.

• What is the money for, and for how long? A one-time repair and years of care costs fit different tools.
• How long will the homeowner stay? The CFPB calls a reverse mortgage an expensive way to cover short-term needs if a move may come soon.
• Is a monthly payment manageable? Home equity loans, HELOCs and refinances all require one on current income.
• What should pass to family? Each path leaves a different amount of equity behind.
• Have other resources been tried? The CFPB points to budget changes, benefits checks through benefitscheckup.org, property tax help from local tax offices, and programs for utilities and repairs. Help from family is another possibility.

Not every option is open to every homeowner. Income, credit, age, existing mortgage balance and the home's value all shape what a lender will offer.

A HUD-approved housing counselor can talk through these questions. HUD lists a HECM Counselor Roster and the number (800) 569-4287 on its HECM page. By law, HECM counseling covers alternatives to the loan, its financial implications, and possible tax, benefits and estate effects.