How can we tap the equity in our home without paying a 7% interest rate? We currently have a mortgage rate of less than 4%.

By Aarthi Swaminathan

'Should I accept that 7%-plus interest rate is the starting rate these days?'

Dear Big Move,

I'm looking for some guidance for accessing equity in my home.

We purchased our house in 2015 at a mortgage rate of less than 4%. So now we have plenty of equity in our home, but no way to access it without settling for 7%-plus rates.

Am I missing something? Have I not been shopping around for enough options? Should I accept that 7%-plus interest rate is the starting rate these days?

I appreciate any advice you have.

Locked In

Dear Locked,

Many homeowners are in your shoes.

In fact, nearly 60% of all outstanding mortgages in the last quarter of 2023 had a rate below 4%, according to an analysis by Realtor.com.

Given that you've owned the home for nearly a decade, you must have considerable equity built up that you want to tap. But with a mortgage rate of below 4% - one that you likely won't see for the next few years, or even at all in the future - it's understandable why you want to proceed carefully.

What options do you have? There are two ways you can access that home equity: Take on a home equity line of credit, or explore working with real-estate startups that offer alternative financing.

Home-equity line of credit

Taking on a home-equity line of credit or HELOC is, perhaps, the most obvious route. "These options carry higher interest rates than a first [and primary] mortgage, but on a much smaller balance," said Phil Crescenzo Jr., vice president of the southeast division at Nation One Mortgage Corporation. So this will allow you to leverage the equity without affecting the primary loan, he told MarketWatch.

A HELOC is a revolving line of credit that is secured by the equity in your home. You're essentially borrowing money against the value of your home. You can vary how much you need to borrow, and the duration you need it for. You're only on the hook to pay back how much you borrowed, much like a credit card.

While you won't get a 4% rate on a HELOC, you will be able to borrow money at a lower interest rate than if you were to take on a personal loan. HELOC rates for loans over $40,000 are mostly over 7%, according to comparison-shopping site Bankrate. And most HELOCs have a variable rate, unlike your primary fixed-rate mortgage.

Home-equity loan

You could also look into a home-equity loan, or HELOANs, which allows you to receive a lump sum in one go. They have a fixed rate. Some companies like Spring EQ that offer cash sooner than traditional banks, and at a fixed rate.

"A home-equity loan offers borrowers a lump sum with an interest rate that is fixed, but tends to be higher," according to credit-reporting agency Equifax. "HELOCs, on the other hand, offer access to cash on an as-needed basis, but often come with an interest rate that can fluctuate."

"Typically, HELOCs will have lower interest rates and greater payment flexibility, but if you need all the money at once, a home equity loan is better," Equifax adds.

Rich Martin, director of real-estate lending solutions at data and consulting firm Curinos, told MarketWatch, said both financing options were good avenues to consider.

"A home-equity loan offers borrowers a lump sum with an interest rate that is fixed, but tends to be higher."Equifax

"They come with slightly higher rates than a first-mortgage cash-out option but allow for greater flexibility," Martin told MarketWatch. "For example, payments can be interest-only during the draw period, and because HELOC fees are often paid by the lender, overall closing costs can be lower than the 2%-5% often required with cash-out [refinances]."

In a cash-out refinance, you take the equity you built up in your home, and add that to your new mortgage. So you will have to pay back the mortgage balance, plus the loan amount you want, and get a higher rate, which is not what you want.

"All this means home-equity products are poised to remain the preferred choice for equity-rich borrowers," Martin continued. "A sustained high-rate environment continues to make the financing rates and features of equity-based products far more attractive than alternatives such as credit cards and personal loans."

A Silicon Valley option

If you're feeling adventurous and up to do your own research, you can also consider looking at startups that do lump-sum amounts in exchange for a stake in your home. Companies that do this include Point, a Palo Alto, Calif.-based real-estate company.

Home-equity investment startups like Point give a homeowner a lump sum up front in exchange for future home price appreciation. Homeowners don't take on a mortgage rate or pay monthly payments, instead they only pay back the money - and a share of the appreciation in their home - when they sell the house or refinance, or when the term ends.

"Point offers a 30-year term, and homeowners can repay their [home-equity investment] at any time that works best for them within that period," Eoin Matthews, co-founder at Point, told MarketWatch.

"Point's minimum credit score requirement is 500 - lower than most HELOCs - and there is no income requirement," he added.

But be warned: The more your home appreciates in value over the period in which you share equity with such companies, you will have to pay more back, as detailed by this story in The Wall Street Journal.

Bottom line: You cannot escape high mortgage rates if you want to extract equity from your home, unless you turn to alternative forms of financing, which are less traditional and carry their own risks.

'The Big Move' is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.

By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

-Aarthi Swaminathan

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06-29-24 0231ET

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