How to Tap the Value of Your Home—Safely

Refinancing your mortgage could save hundreds or even thousands of dollars, plus there are other ways to improve your finances

gold house on blue background Photo: iStock

If you’re looking to save money—or even find some extra—there may be no better place to do it than with your house.

With interest rates near historic lows, refinancing your mortgage could save you hundreds if not thousands of dollars a year. And if you’re struggling with high-interest credit card debt, consolidating it with a low-interest home loan could also be a smart move.

Those are just two of the ways you can use your house to improve your financial situation, especially with housing prices continuing to rise. The key is to do it safely—and for the right reasons. You don’t want to borrow against your house to take an expensive vacation. But you might want to install a new roof or upgrade your kitchen, which will increase the value of your home even more.

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Despite all the potential benefits, most homeowners shy away from refinancing either out of fear, lack of information, or the belief that it’s not worth the effort.

“The overwhelming majority of mortgage borrowers have not yet refinanced, despite record-low rates over the past year,” says Greg McBride, chief financial analyst for the online financial site Bankrate.com. According to a recent survey of over 1,000 homeowners by Bankrate, 74 percent of borrowers aren’t refinancing their mortgage. 

The top two reasons are the high costs associated with the process and its time-consuming nature. Other reasons include too much paperwork, plans to move soon, and concerns that their credit scores aren’t high enough. Current rates for a 30-year fixed-rate mortgage average about 2.9 percent, and most pre-pandemic mortgage holders are paying 3.5 percent or higher.

If you knew you were going to save $10,000 in the next five years, you’d probably be willing to devote a few hours of your time this month to it.

Greg McBride

Chief Financial Analyst, Bankrate.com

​​“My wife inquired about refinancing with her cousin who does mortgages, but was told that if it wasn’t saving us more than a percentage point, it wasn’t worth it,” says Eddie Vera, who pays 3.5 percent on the mortgage he’s had since 2017. “I also have a friend who went through the process and didn’t feel it was worth the headache.”

Those concerns have merit, McBride says. The costs can be steep. Banks charge a fee to give new mortgages with a lower rate that’s usually 2 percent to 5 percent of the loan. Although that can add up to thousands of dollars, the rule of thumb is to compare that amount with how much you’ll save from refinancing. If you’re saving more than the fees (which depends on how long you plan to stay in your house), then it’s worth doing. 

And the process can be time-consuming—especially as work-from-home pandemic rules create logistical bottlenecks that can disrupt effective communication between lenders, borrowers, and other key players in the process. On top of those concerns, distrust of the refinancing industry may be keeping some borrowers—especially those in Black and Latino communities—from taking advantage of potential savings. 

Contacting a HUD-certified housing counseling service can help concerned borrowers, says the Rev. Dr. Charles Butler, who helps run a New York-based nonprofit that offers housing counseling and other community empowerment programs. 

And the benefits of refinancing can be substantial. 

“If you knew you were going to save $10,000 in the next five years, you’d probably be willing to devote a few hours of your time this month to it,” McBride says.

To illustrate the point, Bankrate calculates that if you have a 30-year loan for $300,000 at 4 percent, your monthly payment is $1,432. Refinancing at 3 percent would cut it to $1,265, a savings of $167 a month or $2,004 a year. 

And the process doesn’t have to be complicated. We’ve outlined options available to help homeowners unlock cash, lower their payments, or both, safely and efficiently. 

Refinancing Your Mortgage

A traditional refinance, known as rate-and-term, is a good way to reduce your interest and monthly payments. You can also try to switch the terms of your mortgage if you haven’t built a lot of home equity but have improved your credit score and paid down other debts. 

“People that are doing this type of refinance aren’t taking any money out, they’re just refinancing the balance they have at a lower rate,” McBride says. “The motivation is interest savings, either by reducing their rate and monthly payment or shortening the term.”

But homeowners need to weigh the closing costs.

“In instances where you’re planning on moving within a couple of years or you’re just not sure how much longer you’re going to be in the home, it wouldn’t make sense to refinance because you’re probably not going to earn back the costs of the refinancing,” McBride says.

For example, if the fees are $4,000 but the yearly interest savings are $1,000, you’ll have to stay in your home for at least four years to pay off the fees and five years to start seeing savings and a reduction of your principal. 

So if you plan to stay in your home long enough and the fees are manageable, you could reduce your overall costs by thousands and lower your monthly payment by hundreds of dollars.

FHFA Refinancing Option

This is a new option for low-income borrowers who haven’t been taking advantage of low interest rates. The program, which was started earlier this year by the Federal Housing Finance Agency (FHFA), could save eligible borrowers $1,200 to $3,000 a year, the agency says. 

“Last year saw a spike in refinances, but more than 2 million low-income families did not take advantage of the record low mortgage rates by refinancing,” said the FHFA’s director, Mark Calabria. 

To qualify, borrowers must:

• Have a mortgage that’s backed by Fannie Mae or Freddie Mac.

• Live in an owner-occupied single-family home.

• Have an income at or below 80 percent of the immediate area’s median income.

• Have no missed payments in the previous six months, and no more than one missed payment in the previous 12 months.

• Not have a mortgage with a loan-to-value ratio greater than 97 percent, a debt-to-income ratio above 65 percent, or a FICO score lower than 620.

Under the program, lenders will provide a savings of at least $50 in the borrower’s monthly mortgage payment, and at least half a percentage point reduction in the borrower’s interest rate.

Borrowers can also get a maximum $500 credit from the lender for an appraisal if they aren’t eligible for an appraisal waiver. They won’t be required to pay the up-front adverse market refinance fee if their loan balances are at or below $300,000.

Loan Modification

Instead of refinancing your mortgage, a lender may agree to new terms that reduce your monthly payment to an amount you can better afford, according to the Consumer Financial Protection Bureau. Known as a loan modification, the agreement may extend the number of years you have to repay the loan, reduce your interest rate, postpone or delay your payment (forbearance), or reduce your principal balance. 

According to the Experian credit bureau, a loan modification is intended for those who are struggling to keep up with mortgage payments and are seeking ways to avoid foreclosure. To qualify for a modification, a borrower should be able to demonstrate that their financial situation has changed significantly, making it difficult to make the agreed-upon payments. 

While different lenders have different requirements for loan modifications, Experian says that for most, in order to qualify you must be at least one regular mortgage payment behind or show that missing a payment is imminent.

You will also probably need to prove significant financial hardship. This can include long-term illness or disability, death of a family member (and loss of their income), being affected by a natural or declared disaster, the uninsured loss of property, a sudden increase in housing costs (including hikes in property taxes or homeowner association fees), and divorce.

A lender might be inclined to modify your loan because doing so can help avoid the expense of seizing and reselling your property if you default. A HUD-certified adviser can help you make your case or connect you to free or low-cost legal help.

Getting some legal assistance can improve your chances of securing a modification. Someone with knowledge of the process will help you organize the documents needed and prepare you to answer the questions the lender will ask.

One of the drawbacks that a loan mod presents, according to Experian, is that it will probably have a negative impact on your credit. But the credit bureau says it will be less severe than a foreclosure. If a mortgage modification works as intended and allows you to stay in your house and resume regular on-time mortgage payments, you’ll be in a good spot to begin rebuilding your credit.

There is another less common use of the term “loan modification,” McBride says.

“It’s when the lender provides the benefit of a lower rate while keeping the existing loan term, saving the borrower from potentially refinancing with a competitor,” he says. “These are little-known and not commonly used, mostly because only lenders that hold the loan on their books have the freedom to make these adjustments. Most lenders sell their loans to government-sponsored entities like Fannie Mae or Freddie Mac or to investment pools, so this isn’t something they can offer.”

Cash-Out Refinance

This is a good option for homeowners who have built up a substantial amount of home equity through years of on-time payments and would like to take a lump sum of cash to use however they see fit.

Home lending pros recommend that the money be used to pay for upgrades that increase a home’s resale value, pay down more expensive debt (like credit cards), fund retirement investing (like a Roth IRA), or beef up emergency savings.

They warn against using the cash for more frivolous uses. “A bit of concern was that 10 percent of homeowners [surveyed by Bankrate] felt that a vacation or purchasing a big-ticket nonessential item would be an appropriate use of home equity,” McBride says.

But Butler warns “it’s a cash-out, and so if you’ve got the money, you’re going to have to pay it back.” That’s why you should use the money only for a profitable purpose, he says.

The process of applying for a cash-out refinance is basically identical to the rate-and-term refinance. And similarly, the homeowner is swapping one loan for another, and continues making just one monthly payment going forward. But instead of keeping the accumulated equity in the home, as you do for a rate-and-term refinance, with a cash-out refinance the homeowner gets a check on closing day for whatever equity they seek to remove from the home.

Homeowners should closely consider what they owe on their mortgage. If it’s low, they should reconsider a cash out. McBride says that most lenders won’t offer a cash-out refinance for a mortgage when the loan balance is below $100,000 or $50,000. ​​But Butler warns that unscrupulous lenders might be willing to make loans even with a low balance. 

He says he’s helped homeowners who only owed $40,000 or $50,000 on their mortgage in 2000. Just a few years later he says they owed $500,000 or $600,000 because they kept borrowing money against the increasing value of their home. When the bubble popped and housing prices crashed, many of them faced foreclosure because they now owed more on their mortgages than their homes were worth. 

“People were refinancing with bad information, and that put their houses in jeopardy,” he says.

FHA Streamline Refinance

This option is for borrowers whose loans are insured by the Federal Housing Administration, as long as they’re not delinquent. Like most refis, it will help reduce monthly payments and lower the interest rate, but it’s not intended to give borrowers much access to home equity—you’re only allowed to take out $500.

Unlike other refinancing products, an FHA Streamline Refinance generally doesn’t require an appraisal of the home and may only require a limited credit check or sometimes no credit check at all. As the name implies, this can be a quicker way to refinance.

There are some strict guidelines that need to be met in order for a borrower to qualify.

This is available only to FHA borrowers, and you can’t add more than 12 years to a loan’s term. Also, you’ll have to pay a mortgage insurance premium (MIP), which protects your lender if you default on your loan. To stop paying the MIP, you’ll have to switch to a conventional loan, have at least 20 percent equity in your home, and have a minimum 620 credit score.

With a streamline refinance, you can’t simply extend your loan’s term in order to lower your monthly payment; you must also reduce your interest rate. 

And finally, like most refinance products there are closing costs, and those costs can’t be wrapped into your loan payments. Some lenders will offer to pay those for you, but in exchange they’ll increase your interest rate.

Reverse Mortgage

This is a refinancing product that’s available only to people 62 years or older. It can be a useful tool for those who need funds and want to borrow against the value of their home, McBride says.

You receive cash as a lump sum, a fixed monthly payment, or a line of credit according to the value of your home. As long as you keep up with your property taxes, home insurance, and house maintenance, a reverse mortgage doesn’t have to be paid back until you move out, sell your home, or die. 

“A reverse mortgage would eliminate the monthly mortgage payment, drastically reducing household expenses, and can enable borrowers to tap their accumulated equity via a lump sum, regular payments, or a line of credit,” McBride says. 

For borrowers with much of their wealth tied up in their homes, a reverse mortgage can help stretch retirement savings to avoid tapping into Social Security early, he says. “It can also be used as a tool to stave off having to tap retirement accounts, either in down-market years or to allow more time for tax-advantaged growth [like a Roth IRA,]” McBride adds.

However, this loan product is complicated, risky, and controversial. One big concern is that when the loan holder dies, the home’s ownership transfers to the bank. If the surviving spouse isn’t also on the loan, they often face eviction unless they can afford to buy the home back from the lender. Plus, these compounding-interest loans can be expensive. And seniors who can’t keep up with taxes, insurance, and home maintenance while they live in the property risk defaulting on the loan and losing their house. 

New regulations under the government’s Home Equity Conversion Mortgage (HECM) program, which took effect in 2017, require that borrowers demonstrate the ability to pay property taxes and insurance premiums on the property. Lenders now look at the borrower’s income and credit history to ensure they can meet their financial obligations. But Consumer Reports believes more reforms are needed to protect borrowers better.

Home Equity Line of Credit (HELOC) / Home Equity Loan

Both of these products are best suited for homeowners who have already refinanced, McBride says. They’re both second mortgages, meaning you’ll have to make another monthly payment on top of your mortgage payment. That’s why McBride stresses that with rates as low as they are, homeowners who haven’t yet refinanced are better off doing a cash-out refinance as a way to both reduce their rate and tap home equity. 

A HELOC and a home equity loan have a few big differences. A HELOC works more like a credit card, setting aside a sum of money that you can tap into a little at a time, as needed, and the monthly charges fluctuate. A home equity loan provides a lump sum of money to the borrower, and the charges don’t fluctuate during the term of the loan. 

“A HELOC is best suited to something like home improvements, where the costs will be incurred in stages as you only borrow what you need, when you need it,” McBride says.

At first, during what’s known as “the draw period,” you’ll only be required to make minimum payments, sometimes just the interest. But when that expires, you’ll be expected to make payments that include both the interest and the principal of the HELOC, and your monthly expenditure could become a lot more expensive. If you don’t access your HELOC at all, you’ll still be required to pay back the loan plus fees.

“A home equity loan is considerably less common and is often used for something like a debt consolidation, where the money is all disbursed up front and repaid in even installments over the term of the loan,” McBride says.

Remember, you’re using your home as collateral. Adding another monthly payment can be tough to keep up with, especially if your finances are already stretched. Missing payments could trigger the bank to foreclose on your home and evict you.  


Image of Octavio Blanco, editor at CR with Money CIA

Octavio Blanco

My mission: To write stories that broaden readers' horizons and offer new solutions they can apply to their lives. Who I write for: My family, my friends, my neighbors, myself, and—most important—you. My passions: Music, art, coffee, cheese, good TV, and riding my electric bike (for now). Find me on Twitter: @octavionyc