Products for withdrawing from a home's equity?

Question

I am a current homeowner with a property that has no mortgage (everything has been paid off). A family member is in need of some cash to consolidate some credit card debt and I would like to help them out. However, the amount of money that they need is in the upwards of 100k.

Using my home's equity to open a secured loan, what I've found so far are two main types of secured loans: HELOC and home equity loan.

With a HELOC, I feel like this is more of a credit card that uses my home as collateral. I rather have one lump-sum payment now and pay back a loan at a fixed rate. So my issue with this is that since the rates are variable in relation to the prime rate (which I believe will rise in the upcoming years), I don't want uncertainty when repaying the HELOC.

With a home equity loan, most banks that I've checked (Citi bank, Chase bank, 5/3 bank, many others) only allow a home equity loan to be opened as a 2nd lien mortgage and I must have a current mortgage. Since I don't have a 1st lien mortgage, I do not qualify (according to the banks that I checked).

My question is, besides these two products, do I have any other option/product to request a one-time, lump-sum loan that I can pay back (at a fixed rate, preferably) over the next 10/15 years? And are there any banks that allow home equity loans as a 1st lien mortgage? If not, am I only stuck with a HELOC?

I tried searching online for others who had the same problem but most forums (and banks) are trying to push HELOC above everything else. As mentioned above, I rather not pay variable rate loans. The closest forum that I found that describes my issue is here: https://www.nerdwallet.com/community/t/take-out-loan-against-paid-off-house/8000 However, the community suggested opening a HELOC.

Let me know if you have any thoughts, I appreciate any help. Thanks.

Disclaimer - I trust this family member to help pay me back. I understand the risks of what will happen if I fail to make payments on any loan that uses my home as collateral.

Answer 1

Yes, the product you want is a fixed rate loan. As rates were dropping in the late '90s, I went from a "Mortgage" to a "Home Equity Loan." The latter had a fixed rate, 15 year term, and a crediting structure for payments that ran by the day. i.e. unlike a mortgage whose amortization is unchanged if you make every payment 10 days early vs 5 days late, this product lent itself to prepayments, or early full payments. That aside, it had no closing costs, but a higher rate. So refinancing from a 6% fixed mortgage to a 5.5% HEL actually made sense. As did another refi to 5% a few years later.

TL:DR - The product is called a Home Equity Loan, and you should shop around to find one that suits you.

Mandatory disclaimer - You should not do this. Not unless you have the assets to take this on yourself, and say goodbye to the $100K. Years ago, I 'lent' my sister in law $10,000, and I told my wife that I never expected to see it again. Which I haven't. The $10K paid off a card she defaulted on, and set her up for a refinanced mortgage. She stuck to my one condition, that she take $400/mo from the reduced payments, and deposit to her matched 401(k). There's over $50K in that account from this deal. I offer this long anecdote in case the family member will be a burden to you in the future and somehow this will still benefit you by lessening that future issue.

Answer 2

The other answers mentioned, there are banks that allow home equity loans as first lien loans, and I believe that's true unless it's changed. You may just need to call more banks, and maybe more banks like those Allen mentioned. Also shop around for costs, interest rates, and prepayment penalties if any.

But I'm surprised no one mentioned that you can take out a regular mortgage and take the cash at closing. It's called a cash out mortgage and is quite common. There are also options to take a higher interest rate in return for cash back at closing to pay some or all of the closing costs. This is called things such as a no cost loan or negative points. If the interest rate of the no cost loan is less than the interest rate for a home equity loan it may be the better option. You'd have to find a lender that will guarantee all the closing costs will be covered. Also this is a case where shopping around could pay off. Rates vary more with no cost loans.

The HELOC may have cheaper costs upfront, and even a lower initial interest rate, but the variable interest rate could end up costing you significantly more over time if interest rates go up.

Also I must whole heartedly agree that you should not do this unless you can afford to never see any of the money again and not have it affect your financial goals in any way. "Loaning" money to friends or family is almost never a true loan and should always be thought of as a gift even if there is a chance they will pay it back.

There is a reason this person got into so much credit card debt and they are unlikely to change overnight.

Answer 3

Firstly, congrats on a mortgage-free home!

I wanted to echo that what you want is the "Home Equity Loan" aka fixed rate loan.

I noticed you mentioned a lot of bigger/national financial institutions (Chase, Citi, 5/3), have you looked into your local community bank or credit union? Local institutions have the potential to be more flexible and creative in their financing if they keep their loans on the books.

I did a search for "home equity loan 1st lien position" and came across two credit unions on the first page of search results that specifically offer this product. I presume that there would be more that you might qualify for based on where you live, work, go to school, worship or are related to. It looks like first lien position home equity loans are still possible but you'll have to venture outside of the big banks to get one.

Another option that you might consider: get the HELOC, borrow/lend the money, then re-fi into a 15-year mortgage. This is the long way around and incurs additional costs but might open up more options for you since you're not looking for a first position home equity loan, you're just doing a 1st position mortgage.

Allen

Answer 4

I disagree with the other answers. I believe your best choice is a simple "cash out refinance" instead of a home equity loan. The reason is your interest rate will likely be lower with a "refi" than a home equity loan. For example, the difference between 4% and 5% would end up saving you almost $6K in interest on a $100K loan for 10 years.

The biggest downside of the refi is you have to pay much higher closing costs (could be more than $1K) than you would with the home equity loan (which sometimes have no fees at all). If you were only borrowing the money for a year or two, the extra fees may not be worth it, but you stated you're thinking about a 10-15 year term. In that case the lower interest rate should easily make up the difference compared to the fees.

Obviously this all hinges on the fact that a cash out refi rate will be different enough compared to the home equity loan rate. Shop around and make sure this is true for your situation.

Side Notes:

• The above assumes your home equity is quite a bit more than $100K.
• What you want to do really ought to be called a "cash out finance" instead of a "cash out refinance", but alas, no one calls it that.
• Beating a dead horse here, but, with few exceptions, someone who amassed $100K in credit card debt is unlikely to pay you back in full in your lifetime. I got the impression you know this and are OK with it, and that's really nice of you.