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Financial emergencies such as medical expenses, car repairs, unexpected fines and even urgent pet care can easily throw a wrench in your financial plans. As rising costs and fears of a recession are sparking money worries, the average American has to carefully consider their options.
Though an emergency fund is good insurance against financial turmoil, it’s not always an option. Only 44 percent of Americans have enough funds to cover a $1,000 emergency expense, while a mere 47 percent have more in rainy-day savings than they do credit card debt. And even still, back-to-back crises can quickly wipe out your savings. While taking out a personal loan or going into credit card debt may pay the bills now, the fees and interest rates can pose major obstacles.
Meanwhile, homeowners with equity in their house have another option. By cashing in on the ownership of your home with equity loans, equity credit and equity sharing agreements like Unlock, you can avoid paying high interest rates when rough financial times come knocking.
How home equity can be an option for unexpected expenses
Home equity is the share of home you own on a mortgage; essentially, it’s the difference between your home value and the amount you owe. The more you’ve paid on your mortgage and the higher your home’s market value increases, the more equity you have available. There are several options to cash in on your home value.
A cash-out refinance is a type of remortgage allowing you to replace your current mortgage with a larger loan in exchange for cash taken out of the equity. Another option – the traditional home equity loan – allows homeowners to borrow a lump sum of cash against their equity to be paid out later. On the other hand, a home equity line of credit (HELOC) has flexibility in how much money you can withdraw. Of note, home equity loans and HELOCs come with separate repayment terms and interest rates from your original mortgage.
A fourth option is to enter an equity sharing agreement. Equity sharing companies will buy out a share of the home’s equity in exchange for a larger portion of the equity in the future. Homeowners either buy out their equity share after an agreed-upon time period or pay out a percentage of the amount they later sell the house for.
Home equity agreements can be appealing for homeowners looking for alternative ways to get equity out of their home but may not be able to afford increased or additional monthly payments. Also, the process can be comparatively quicker and have lower credit requirements while avoiding high interest rates.
What to consider when cashing out equity
While home equity can be a financial cushion, it’s not a good idea to treat your home as a piggy bank for incidental expenses. Cashing out on your equity doesn’t happen instantly, and comes with fees, requirements and other factors to consider.
Most equity loans, HELOCs, refinances and sharing requirements require that you have over 20 percent equity in your home, while some require that 20 percent equity remains after the cash out. These options have income requirements and credit score minimums.
Additionally, a cash-out refinance replaces your previous monthly payment and term and starts it anew, while home equity loans and HELOCs require a separate payment on top of your primary mortgage payment each month. For these options, the total amount you’re paying for your mortgage each month will increase. Other options in refinances, home equity loans and equity sharing agreements will give you a lump sum of cash. HELOCs, meanwhile, are flexible in how much money you withdraw.
Finally, refinancing, home equity loans and HELOCs can take a number of weeks for approval. Since they’re essentially loan applications, you won’t be able to access your money immediately. All forms of equity cash outs also come with closing fees.
Equity access comparisons
|Cash-out refinance||Home equity loan||HELOC||Equity sharing with Unlock|
|Equity requirement||20 percent equity||15 percent to 20 percent equity||15 percent to 20 percent equity||20 percent equity|
|Min. credit score requirement||Varies — typically 620||Mid-600s||Mid-600s||500|
|Max borrowing amount||80 percent of equity||80 percent of equity||80 percent of equity||10 percent of total home value|
|Approval time||45 to 60 days with 3-day waiting period||14 to 42 days||30 to 60 days||10 to 30 days|
|Payout||Lump sum||Lump sum||Line of credit||Lump sum|
|Interest rate||Fixed or variable||Fixed||Variable||None|
|Repayment terms||Single monthly payment over 15 to 30 years||Extra monthly payment over 5 to 30 years||Variable extra monthly payment over 20 years||No monthly payments; owner pays back agreed-upon percent of home value|
|Fees||3 percent to 5 percent of loan||2 percent to 5 percent of total loan||2 percent to 5 percent of total loan||3 percent of total loan, other closing costs|
Why access home equity through sharing agreements
Equity sharing agreements can be a viable option for homeowners who need quick, lower-requirement access to cash. While there are downsides to equity sharing, here are a few reasons why this option may be for you.
Home equity shares often come with lower requirements than a refinance, home equity loan or HELOC. If your credit score has taken a dip due to bill pileups, or if you don’t meet the income requirements for traditional equity cash out methods, a home equity share can still free up your money while you recover.
Faster cash out
Home equity shares can get money into your hands more quickly. While there is still a turnaround time for application approval and house inspection, equity shares can offer a faster cash out than traditional equity access methods — sometimes in as little as 10 days — with no waiting periods.
No monthly payments
One of the biggest benefits to an equity sharing agreement is no monthly payment. Refinances, equity loans and HELOCs can put a wallop on your wallet with increased or additional monthly payments. Home equity shares, however, only require payment upon sale of the home or at the end of the sharing agreement, giving you a chance to get back on your feet before you pay.
Avoid rising interest rates
You don’t need to pay interest on an equity share when it’s time to sell your home or buy back the share. This means that even as interest rates rise, your payment will remain the same.
How Unlock turns equity into cash quickly
Unlock is an equity-sharing company that allows you to access your equity quickly and effectively, with lower requirements and no monthly payments.
Unlock works by buying out a future share of your home’s equity in exchange for immediate cash. When the share begins, you can access between $30,000 and $500,000, depending on your home’s value, up to a certain threshold of home equity. In exchange, Unlock receives a larger portion of your equity upon the agreement’s end or home sale — so if you sell 10 percent of your total equity at the beginning, Unlock will receive 16 percent at the end of the term.
Homeowners have flexibility in how they pay Unlock back. You can sell your home and give Unlock the share amount from the sale price. You can also buy back the share before the agreement ends, either in increments or a lump sum.
Unlock can offer a more flexible path to financial freedom if you’re stuck in a bind. If an unexpected medical bill has drained your emergency fund and is hurting your credit score, a cash out through Unlock means you can pay your bills and not have to worry about qualifying for a refinance, paying high rates on a personal loan or juggling increased payments.
Further, if your home’s value increases because of home improvements, you can still pocket the difference when you sell.
Freeing up cash now can also carve a better path for your future. When you’ve lost your job, cash from your equity doesn’t have to just pay the bills — you can also use it to further your education and land yourself a higher-paying career.
With these benefits in mind, see if Unlock is a good fit for you. If you have at least 20 percent equity in your home and a credit score of 500 or more, then it may be worth seeing if you qualify.
The bottom line
While a financial emergency can add a lot of stress to your life, it isn’t the end of the world. Your homeownership can give you an extra layer of protection when things go wrong — though keep in mind that it shouldn’t replace having insurance or an emergency fund on hand when it comes to preparing for a financial emergency.
Whether it’s a new baby, an auto accident or paying off your credit card debt before rates rise, Unlock can give you a fast and easy way to access your home equity, freeing you from financial fear in the future.