Consumer Financial
Protection Bureau
OLDER AMERICANS HOUSING GUIDE
Using home equity to
meet nancial needs
USING HOME EQUITY TO MEET FINANCIAL NEEDS3
Using your home equity to
meet your nancial needs
Having nancial security as you age is important.
Owning a home is most people’s greatest asset
and can be a resource for you and your family.
This guide describes how you might be able to
use your home equity should the need arise—
and also the potential risks involved.
Your home equity is equal to the value of your home minus the total
amount of existing mortgages on your property.
How much home equity do you have?
The amount your property
is currently worth
$
Your home equity
$
The total of all mortgages
on the property
$
This guide provides general consumer information. It is not legal advice or regulatory guidance. For
information on how to obtain legal help, please see the “Where to go for help” section of this guide.
This guide also includes links or references to third-party resources or content. The Bureau does not
endorse the third-party or guarantee the accuracy of this third-party information. There may be other
resources that also serve your needs.
USING HOME EQUITY TO MEET FINANCIAL NEEDS 4
Using your home equity:
benets and risks
By taking out a loan that uses your property as collateral, you
might be able to convert your equity into money that you can use
to provide additional monthly funds for living expenses, pay for
repairs to your home, fund home improvements (including those
that may help you stay in your home as you age), pay for caregiving
expenses, or for other purposes.
While using your home equity can have benets, keep in mind
that by doing so you are taking out a loan that must be repaid.
Because you use your home as collateral for this loan, if you fail
to make payments or meet other loan requirements, you could
be at risk of losing your home through foreclosure. Other things
to consider:
§ Be careful about borrowing more money than you need,
because you are responsible for paying the money back plus
interest and fees.
§ Taking out a new loan could affect your credit score, since it is
another debt that you owe.
§ Loans generally have upfront costs you must pay, which reduce
the amount of equity you can use.
§ Watch out for scams. Avoid any companies that ask for big
fees up-front or that make unrealistic promises. Also beware
of home repair scams where contractors approach you (often
knocking on your door) about taking out a loan to pay for
repairs. It’s important to shop around.
USING HOME EQUITY TO MEET FINANCIAL NEEDS5
Ways to convert home equity into money
In this section you’ll see general descriptions of four types of loans you
might be able to use to access the equity in your home.
Who is
generally
eligible to
apply for
this loan?
How can you
receive the
money?
Do you make monthly
payments?
What happens to
your loan balance
over time?
Cash-out
renance
A homeowner
who has
equity in
their home
and who has
an existing
mortgage.
All at once when
you take out
the loan.
Yes. You have a new
mortgage that includes
the amount borrowed
(and fees) from the cash
out renance, which
includes the money
used to pay off your
previous mortgage.
Your loan balance
decreases as you
make monthly
payments.
Home
equity loan
A homeowner
who has
equity in their
home.
All at once when
you take out
the loan.
Yes. This is a separate
loan from your
mortgage, so you have
two monthly payments:
(1) mortgage, and (2)
home equity loan
Your loan balance
decreases as you
make monthly
payments.
Home
equity line
of credit
(HELOC)
A homeowner
who has
equity in their
home.
You can access
the money as you
need it, up to a
limit determined
by the lender.
Yes, but only once you
start borrowing from
your line of credit.
Your monthly payment
depends on the amount
of the line of credit that
you use.
Your loan balance
increases as you
withdraw money
from the line of
credit, and then
decreases as you
make monthly
payments.
Reverse
mortgage
A homeowner
who is 62
years or
older and has
equity in their
home.
You can receive
money all at once
when you take
out the loan, in
regular payments
over time, or as
a line of credit
you can use when
needed.
Reverse mortgages do
not require monthly
payments. You repay
the loan all at once
when you no longer live
in the home.
Your loan balance
increases over time,
but you never owe
more than 95% of
the appraised value
of your home at the
time the loan is due.
USING HOME EQUITY TO MEET FINANCIAL NEEDS 6
Cash-out renance
If you have equity in your home and also have an existing
mortgage, you could consider a cash-out renance. This means
that you take out a larger mortgage loan against your home, use
some of that amount to pay off your current mortgage, and take
the rest in cash to use for other purposes.
If you are considering a cash-out renance, keep in mind the
following:
§ A cash-out renance may extend the amount of time it takes
to pay off your mortgage. Your monthly payment may also
increase, since you are replacing your current mortgage with a
larger loan.
§ Because you are getting a new loan to replace the one that you
have, your new interest rate and other loan terms change. Make
sure you understand those details before agreeing to the terms.
§ Cash-out renance loans are usually paid back over a period
of 30 years. While this means that your monthly payments may
be smaller than if your mortgage loan was for a 15-year term,
it is important to know that you are paying back the loan for a
longer period of time and that your loan balance accordingly
decreases at a slower rate.
Home equity loan
A home equity loan is a new mortgage loan that you take out
using your home as collateral. If you have an existing mortgage, a
home equity loan is a second mortgage with a second, separate
monthly payment. If your home is paid off, taking out a home
equity loan is a new mortgage on your property.
USING HOME EQUITY TO MEET FINANCIAL NEEDS7
If you are considering a home equity loan, keep in mind that:
§ A home equity loan usually has a xed interest rate, which
means that your monthly payment does not change over time.
§ Compared to traditional 30-year mortgages and cash-out
renances, home equity loans are usually paid back over a
shorter period. While this means you make payments for a
shorter amount of time, it also means that those payments are
probably larger than for a longer loan.
Home equity line of credit (HELOC)
Similar to a home equity loan, a home equity line of credit
(HELOC) allows you to use your home as collateral for a
loan. However, unlike a home equity loan, a HELOC is
“open-ended,” meaning that it allows you to borrow money
against your home equity, up to a limit, whenever you need
it. HELOCs have an initial “draw period,” meaning that you
can borrow within a certain time period, usually ten years.
During the draw period, you are required to make interest
payments based on the amount you borrowed. After the
draw period ends, you then enter the “repayment period,”
during which you must pay off the outstanding balance
through regular payments of interest and principal.
If you are considering a HELOC, keep in mind that:
§ HELOCs are more exible than other loans in that they allow
you to withdraw money multiple times and allow you to
withdraw only the amount that you need
§ HELOCs often have adjustable interest rates, so after an
initial xed period, your interest rate can increase or decrease
based on the market—thereby changing the amount of your
monthly payments
USING HOME EQUITY TO MEET FINANCIAL NEEDS 8
Reverse mortgage
With a reverse mortgage, you borrow money using your home as
a guarantee for the loan, as you would for a traditional mortgage.
Unlike a traditional mortgage, a reverse mortgage is repaid when
the borrowers no longer live in the home. Although you don’t
make monthly mortgage payments, you need to continue to
pay property taxes and homeowners insurance, and keep your
house in good condition. Because interest and fees are added
to the loan balance each month, your loan balance goes up—not
down—over time. As your loan balance increases, your home
equity decreases. Reverse mortgage borrowers must be age 62
or older. For more information about reverse mortgages, see
the CFPB’s reverse mortgage page at consumernance.gov/
reversemortgage.
If you are considering a reverse mortgage, keep in mind that:
§ Closing costs for reverse mortgages are typically higher than
for other loans, which is largely because reverse mortgage
borrowers must pay mortgage insurance. This insurance
guarantees that while your loan balance increases over time,
you never owe more than 95% of what your home is worth at
the time the loan is due.
§ You are required to occupy your home as your primary
residence, continue to pay property taxes and homeowners
insurance, and keep your home in good repair. If you fail to do
any of these things, you can lose your home to foreclosure.
§ As with the other products described in this guide, when you
die your heirs have to pay back the reverse mortgage loan.
Unless they have the money to do so, they can take out another
loan, sell the home, or turn the home over to the lender.
USING HOME EQUITY TO MEET FINANCIAL NEEDS9
§ A reverse mortgage might affect your ability to qualify for
certain public benet programs, such as local property tax
relief programs.
§ You are required to meet with a HUD-approved housing
counseling agency before taking out a reverse mortgage loan.
How to use your home equity is an important decision. You may want
to talk with an attorney, accountant, nancial planner or advisor, or HUD-
approved housing counseling agency before taking out a loan. For more
information about how to contact these professionals, see the Where to go
for help section at the end of this guide.
Questions to ask yourself when
considering your options:
§ How much is your home worth? How much debt do you owe on
your home?
None of the options described above allows you to convert 100%
of your equity into cash. With a cash-out renance, home equity
loan, or HELOC, lenders typically require that you keep at least
10% to 20% of your home value as equity. A reverse mortgage
allows you to convert even less of your equity into cash—the
amount depends on your age, home value, and interest rate.
§ How long do you intend to own your home?
Consider your future when deciding how to use your home
equity. With all the options above, you need to pay back your
loan immediately if you sell your home—so if there is a good
chance that you sell your home in the next couple years, your
short-term access to money may not be worth the fees you have
USING HOME EQUITY TO MEET FINANCIAL NEEDS 10
to pay to take out the loan. Consider options with lower up-
front costs, like a HELOC, over one with higher up-front costs,
like a reverse mortgage.
§ How much can you afford to pay each month?
As the table in this guide shows, different options have
different implications for monthly payments. Keep in mind,
however, that all these options require that you continue paying
property taxes and insurance on your property.
§ How does using the equity in your home impact your long-
term nancial plans?
Converting your equity into cash creates a debt you have to
repay. For home equity loans, renances, and home equity
lines of credit, you repay this debt through monthly payments
to the lender. For a reverse mortgage, this debt has to be
repaid all at once when you no longer live in the house.
§ What implications might this decision have after you die?
Mortgage loans come due upon your death and have to be
repaid by your heirs—which may mean that they need to sell
the house to repay the loan. This is particularly noteworthy
for reverse mortgages because the loan balance that must be
repaid increases over time. For more information, see the CFPB
guide, Leaving your home to children or heirs.
USING HOME EQUITY TO MEET FINANCIAL NEEDS11
Where to go for help
Legal help
§ Free legal services for people
over age 60
Find local programs that provide
free legal help to people over
age 60 by contacting the national
Eldercare Locator at (800) 677-1116
or eldercare.acl.gov.
§ Free legal services for people
with low income
Find local programs that provide
free legal help to low-income
people through the Legal Services
Corporation at (202) 295-1500 or
lsc.gov/nd-legal-aid.
§ Fee-for-service lawyers
The American Bar Association
provides information about how to
nd a lawyer in each state, available
legal resources, how to check
whether a lawyer is licensed, and
what to do if you have problems
with a lawyer, at (800) 285-2221 or
ndlegalhelp.org.
Housing counseling
The U.S. Department of Housing and
Urban Development (HUD) provides
a list of approved housing counseling
agencies that offer advice on buying
or renting a home, curing a mortgage
default, obtaining a forbearance
and avoiding foreclosure. The
HUD-approved housing counseling
agencies offer independent advice,
often at little or no cost to you, at
(800) 569-4287 or consumernance.
gov/nd-a-housing-counselor.
Credit counseling
Most credit counselors offer services
through brick-and-mortar ofces,
online, or via telephone. The U.S.
Department of Justice publishes a
list of approved credit counselors.
Call (202) 514-4100 or see the list at
justice.gov/ust/list-credit-counseling-
agencies-approved-pursuant-11-
usc-111.
USING HOME EQUITY TO MEET FINANCIAL NEEDS 12
Accounting help
The American Institute of CPAs
provides a list of local certied public
accountants, at (888) 777-7077 or
aicpa.org/forthepublic/ndacpa.html.
Benets for older adults
The National Council on Aging
publishes a free Benets CheckUp
tool that connects older adults with
benets that they may qualify for. Call
the helpline at (800) 794-6559 or visit
benetscheckup.org.
More CFPB resources consumernance.gov/olderamericans
