Need Cash Out of Your House? Here Are Your Options

When you buy a house, you often end up with a lot of equity in it. Equity is the difference between the amount you owe on your mortgage loan and the amount the house is currently worth. So if you owed $100,000 and the house was valued at $500,000, you would have $400,000 in equity.

There may come a time when you want to access this equity in your house to do something else with it. You might decide you want to make home improvements or repay high-interest credit card debts so you can pay off what you owe at a lower rate.

If you want to get cash out of your house, you have a few different options for doing so.

Sell your house

Selling is one way to get cash out of your home if you can find a buyer willing to pay more than what you owe on your mortgage. The mortgage lender will be paid first, and you'll get to keep what's left over after closing costs.

Of course, this works only if you don't want to live in your house anymore. And you'll have to wait to find a buyer, which can take time. Plus, there are closing costs to pay. These could be as much as 10% of your home's value, since you'll have to pay real estate agent commissions. You may also have to spend a lot of your profits paying for another place to live.

This option isn't going to be the right one for anyone unless they happen to be selling anyway, due to all of these downsides.

Get a cash-out refi loan

A cash-out refinance loan involves doing two things at once:

• Refinancing your current mortgage
• Getting cash out of your bank

Basically, with this option, you get a brand new mortgage that's large enough to pay off your existing loan and give you the cash you need. Say, for example, you owed $200,000 on a house valued at $500,000 and you wanted to pull $50,000 in cash out of the house. You could get a $250,000 cash out refinance loan, use $200,000 to pay off your existing mortgage, and keep the rest.

There are a few benefits to this. You'll only have one loan to pay, and the interest on it would be tax deductible up to $750,000 if you itemize on your taxes. Also, if you can get a lower rate than your current home loan, you could reduce your borrowing costs as well.

Unfortunately, this option likely won't work for many people who got their original mortgage loan recently. That's because while mortgage rates hit record lows during the pandemic and were relatively low before then by historical standards, rates are very, very high right now. It would make no sense to do a cash-out refinance of a mortgage with a 3% or 4% rate and get a new loan at a 7% or 8% rate.

Get a home equity loan

A home equity loan is another possible option to get cash out. If you went this route, you'd apply for a loan with a lender of your choosing and would be able to borrow a set amount based on how much equity you have. Most lenders only allow you to borrow up to around 90% of your home's value including all mortgages. So if you had a $500,000 house and already owed $400,000 on your first mortgage, you would only be able to borrow an additional $50,000 at most.

Interest on home equity loans can sometimes be tax deductible, but only if you meet certain requirements -- like using the money to improve the home you're borrowing against. Most are fixed rate loans. The interest rate is usually higher than with a cash-out refinance, but lower than other kinds of loans (like a personal loan), since the house guarantees the loan by acting as collateral.

Get a home equity line of credit

Finally, you could get a home equity line of credit (HELOC). That would give you the chance to borrow up to a certain amount. This kind of works like a credit card in that you can borrow against your house as often as you want until you use up your credit line -- you don't need to decide upfront how much money you need.

You'll typically have an adjustable rate, though, so your costs of borrowing could change. Like with a home equity loan, you can deduct interest if you use the proceeds to improve your home. And the rate is usually going to be lower than with a credit card even though you get the same flexible borrowing options.

Which option is best for you?

Deciding between these options can be complicated, but you should consider the pros and cons of each to decide which is best. In general:

• Selling makes sense only if you planned to do so anyway, and it could take a lot of time to access the cash in your home as you wait to find a buyer.
• A cash-out refinance loan makes sense only if you wanted to refinance your current home loan, which you'd do only if you could get a lower rate than you have on your current loan.
• A home equity loan makes sense if you know upfront how much you want to borrow and want a fixed-rate loan.
• A HELOC makes sense if you want flexibility to borrow up to a set amount and don't mind a variable interest rate.

You must also remember that your home is securing your loan, so if you don't pay back what you borrow, you could lose the house. Don't borrow more than you can comfortably afford.