Best Ohio Home Equity Options of November 2024

Home equity is the difference between the value of a home and the amount of money still outstanding on the mortgage. In other words, it’s essentially the portion of the home that is owed outright. This value can be expressed as a percentage or dollar amount. For example, a home valued at $400,000 with $100,000 remaining in mortgage payments has $300,000 or 75% worth of equity.

Some lenders may require a full appraisal to determine a home's value. However, automated valuation models, which consider local property values and recent home sales, are more common.

Home equity is one of the greatest financial benefits of owning a home. You can tap into the equity you built for multiple reasons, including:

• Debt consolidation: Pay off multiple other types of debt with your home equity loan or line of credit to keep your debt organized and potentially get a low interest rate.
• Home renovations: Use your home equity to help pay for important home renovations and improvements, which can in turn increase your home value.
• Medical bills and emergencies: Cover costly medical bills or other unexpected expenses by tapping into your home equity.
• Large purchases: Use your home equity to cover large expenses involved with weddings, buying a new car, or moving houses.

The most common way to access your home equity is a home equity loan or home equity line of credit (HELOC). There are a few other products as well, so let’s quickly break them down.

Home equity loan

A home equity loan is a type of second mortgage that’s granted based on the equity you currently have in your home. You’ll be limited to borrowing up to 85% of that equity value, with other factors such as your credit score and debt-to-income ratio also impacting the final loan amount.

You’ll receive your loan in one lump sum and will make monthly payments, typically at a fixed interest rate.

Pros

• Consistent monthly payments at a fixed interest rate.
• Relatively lower interest rates compared to personal loans or credit cards.
• Typically have repayment periods, spanning up to 30 years.
• If you use your loan for home improvements or repairs, your home equity loan interest payments may be tax-deductible.

Cons

• Your home is collateral, so if you don’t repay the loan, you could face foreclosure.
• You typically need at least 20% equity in your home to qualify for a home equity loan.
• You’ll need to pay closing costs, with are often around 1% of the total loan.
• It can take a month or longer to access your loan funds.

HELOC

Unlike a home equity loan, HELOCs work more like a credit card — as a revolving line of credit (with an approved credit limit) that you repay based on what you spend. Although some home equity loans have fixed interest rates, most HELOCs will have variable ones — meaning you might pay more or less interest on your borrowed amounts over the life of the loan.

HELOCs are split into two periods: the draw period and the repayment period. During the draw period, you can access funds anytime you need them. Typically, you’ll only need to pay interest on borrowed amounts during this time. Once you enter the repayment period, you can no longer borrow cash, and you’ll need to make regular payments on both the principal and interest.

The value of your HELOC likely won’t exceed 85% of your home’s equity, and approval will depend on your overall creditworthiness.

Pros

• Only need to repay what you borrowed (similar to a credit card) and not the full approved amount.
• Flexibility of accessing funds when you need it, sometimes in the form of debit cards, checks, ATM withdrawals, or online transfers.
• Ability to access funds up to 10 years (the draw period) before entering the repayment period (typically 20 years).
• Making regular payments could help boost your credit score.

Cons

• Rates are often variable, so even if rates are low when you take out a HELOC, they could be higher when it comes time to repay.
• Because you can access funds at any time and aren’t on a strict payment schedule during the draw period, it can be easy to run up a high balance.
• You could have to pay additional fees, such as an early cancellation fee, an inactivity fee, or a withdrawal fee.
• A HELOC borrows against your home equity, which can deplete your net worth and limit additional opportunities to borrow funds.

Home equity agreement (HEA)

A home equity agreement is a contract between a homeowner and an investment company that allows the homeowner to access funds from their home equity without taking out a loan. In exchange for a percentage of future equity, the homeowner receives a lump sum of cash.

The benefit of this agreement is that you don’t have to make monthly payments or account for accruing interest. Instead, you’ll need to repay the investor the principal plus the agreed-upon percentage of the home’s appreciation within a certain time period (typically between 10 and 30 years). If you sell your home within that timeframe, the investor will instead receive a portion of the home sale.

Pros

• Access to a lump sum of cash quickly.
• No monthly payments and no interest accrual.
• Typically lower credit scores are accepted compared to home equity loans or HELOCs.
• The lump sum payment is usually not taxable as income.

Cons

• You are giving up some of the profit (equity) when it comes time to sell your home.
• Repayments aren’t monthly, so you’ll owe a large sum by the end of the term.
• If you aren’t able to pay what you owe, you may be forced to sell your home.
• Your home’s value may skyrocket, increasing the amount owed at repayment.

Home equity investment (HEI)

Similar to a HEA, a home equity investment allows you to access cash from your home equity without a loan. The key difference between a HEA and a HEI comes down to the repayment process. While a HEA repayment is based on the home’s future total value, a HEI is based on the future change in value.

In other words, if your home value increases significantly when it comes time to pay off your HEI, you could be looking to pay quite a bit more than you originally received. Some HEI lenders offer a protection cap, establishing the maximum amount you need to repay regardless of home value increase. Conversely, if your home value decreases, some HEI lenders will share in the loss.

Pros

• Most HEI companies do not take debt-to-income into consideration for approval.
• One lump sum with no restrictions on how you can use the funds.
• No monthly payments and a long repayment term, up to 30 years.
• Secondary properties may qualify for a HEI as well.

Cons

• Will need to repay the investment either when you sell the home or with a cash-out refinance.
• Restrictions on location and property types that can qualify for a HEI.
• Since the cost is tied to the value of your home, you won’t know exactly how much you’ll need to repay.
• Risk of foreclosure if you are unable to repay your HEI.

When it comes to a home equity loan or HELOC, lenders can use different formulas to calculate how much you can borrow. The various factors taken into consideration include your creditworthiness, existing debt, your perceived ability to repay the loan, the appraised value of your home, and the loan-to-value ratio (LTV).

In general, the higher the amount of equity you have in your home, the bigger the loan amount you could receive.

With HEAs and HEIs, the current value of your home and your available equity are two large considerations. Since these companies benefit from an increase in your home’s value, some may apply a reduction to the appraised value to adjust for risks. 

There are two avenues to increasing your home’s equity. The first is making regular mortgage payments. The less you own on the mortgage compared to the home’s value, the higher your equity will be. You could even pay down your mortgage faster to increase your equity more quickly.

The second option is to increase the value of your home. This can be done with various home improvement and renovation projects.

Costs are largely dependent on the product you choose.

With a home equity loan, you’ll need to pay closing costs to cover things like an appraisal, credit report access, document preparation, loan origination, title search, and insurance. You may also be assessed other fees, such as account maintenance fees or minimum balance fees. You will also have to pay the interest on the loan.

HELOCs also include closing costs, as well as other fees that may include annual fees, early termination fees, inactivity fees, transfer fees, and minimum balance fees. During the draw period, you typically only have to pay minimum monthly payments on the accrued interest. Once you enter the repayment period, you’ll make monthly payments of both principal and interest.

HEA and HEI can have upfront costs that could include transaction fees for setting up and managing the contract and third party fees like a home appraisal or title service. Since repayment is based on your home’s future value, the total cost is less predictable than with a home equity loan or HELOC.

Home equity loans and HELOC typically have similar requirements. This includes the amount of equity in your home (usually at least 20%), a good credit score, low debt-to-income (DTI) ratio, sufficient income, and reliable payment history.

HEA and HEI could be a good option for those who don’t qualify for a home equity loan or HELOC as they typically have fewer requirements. These companies will be looking for a minimum amount of equity (usually at least 20%) and proof of ownership. Additionally, they tend to be more lenient regarding income and credit history.