Equity sharing agreement vs. cash-out refinance vs. second mortgage
When it comes to deciding how to best use the equity in your home, there are a few different options to consider – each with its own set of pros and cons. Here's a look at equity sharing agreements, cash-out refinances, and second mortgages, and some things to keep in mind with each option.
Equity sharing agreement
With an equity sharing agreement, you enter into a contract with another party – usually an investor – in which they agree to provide a lump sum of cash in exchange for a percentage of the equity in your home. This can be a good option if you need cash quickly and don't want to take on more debt, but it does mean giving up a stake in your home.
A cash-out refinance involves taking out a new loan – usually at a higher interest rate than your existing mortgage – and using the funds to pay off your old mortgage and any other debts. This frees up cash that you can use for other purposes, but it also means lengthening the term of your loan and paying more interest in the long run.
A second mortgage is simply a loan that is secured by the equity in your home. This can be a good option if you need to borrow a large sum of money and want to keep your first mortgage intact, but it does come with the risk of foreclosure if you default on the loan.