Home Equity Loan and HELOC Alternatives

As property prices go up, your home value increases, especially as you make mortgage payments. This built-up value is your home equity — a reserve that you can access easily. Just remember that borrowing against your equity can put your home at risk, if you can’t make repayments. You can also access other types of financing beyond home equity loans and Home Equity Lines of Credit (HELOCs). Research what’s available while considering your situation. 

Key Takeaways

• If you need financing, you have other alternatives besides a home-equity loan or a HELOC. 
• Focus on responsible borrowing and avoid taking on excessive debt.
• Find out all of your options and weigh the pros and cons before choosing a product.

9 Alternatives to Home Equity Loans and HELOCs

Home equity loans and HELOCs are commonly used to access cash. Although both loan types are secured by property, they differ in nature. 

• Home equity loan: You receive a lump sum upfront as a fixed-term loan. Your interest rate is fixed, as are the monthly payments over the loan term.
• HELOC: Like a credit card, a HELOC is a revolving line of credit. It has a draw period during which you can access funds as you need them. The bank sets a preapproved limit. You only repay the interest on the used amount during the draw period. When the draw period ends, you enter a repayment period with fixed monthly payments. The monthly payments cover interest and the borrowed principal. 

Here are alternatives to home equity loans and HELOCs for you to consider:

1. Cash-Out Refinance 

When you choose cash-out refinance, you can access your home equity by taking out a new mortgage for a larger amount. With the money you receive, you pay off the old mortgage. The new mortgage will have a new set of terms and conditions, including a new mortgage term, monthly balance due and interest rate. 

A refinanced mortgage is a good option if you need a lump sum to pay for emergency expenses, fund home improvements or consolidate debt.

To qualify you will need an excellent credit score and over 20% in home equity. You must have regular employment and proof that you can make the higher repayments. Your debt-to-income (DTI) also factors in. This ratio compares your monthly debt obligations to your gross monthly income.

2. Reverse Mortgage 

A Home Equity Conversion Mortgage (HECM), or reverse mortgage, is designed for homeowners over 62. Use it to access home equity without having to sell your home. You can take a lump sum cashout or receive the funds from the mortgage as monthly payouts. Your home secures the loan. The amount owed and interest accumulates over time.

If you’re a senior who wants to keep your home, but it’s difficult to make ends meet, a reverse mortgage may work for you. Use it to cover maintenance or medical expenses or consolidate debt.  

3. 401(k) Loan

With a 401(k) loan, you borrow from the balance of your 401(k)-retirement savings plan, which can include employer and employee contributions. It’s like taking a temporary loan from yourself, with interest. 

You can typically borrow the lesser of half of your assets or $50,000. Repayment is due within a mandatory period, usually five years. The payments can come from your salary. Interest is paid back into the retirement fund. 

Some plans may allow you to use your savings for a down payment on a home. You could also use it in an emergency or to consolidate high-interest debt at a lower interest rate. 

4. Rent-Back Agreement

A rent-back agreement, or a sale-leaseback, is a temporary arrangement between a home seller and buyer. The arrangement happens when a house is sold. The sale agreement is concluded as usual. Ownership transfers to the buyer. The seller, by agreement, continues to live in the house and pays the buyer rent for the privilege. 

This arrangement typically happens when the seller needs more time to conclude the purchase of a new home. The buyer can generate extra income from the arrangement. This could help to pay for mortgage costs.  

5. Bridge Loan

A bridge loan is a temporary solution you can use while you negotiate a more permanent loan. These loans typically last from a few weeks to three years. You’ll repay the loan when you secure a longer-term loan. A bridge is usually secured, so you need an asset, like property as collateral.

Bridge loans work well where you have a temporary cash-flow gap. These loans are often used to secure a new property while you wait for the sale of the old property to go through. The bridge loan can help you to ensure the home of your dreams without the restriction of selling the old one. 

Lenders must have a clear exit strategy when taking a bridge loan.

6. Home Equity Sharing Agreement

A home equity sharing agreement (HESA) allows you to access a portion of your home equity without taking out a traditional loan. You effectively sell part of the future appreciation in your home to an investor for a lump-sum payment. The agreement ends when you sell your home. You then repurchase the investor’s share at the appreciated value. 

A HESA is an option if you don’t qualify for a traditional loan. You can also avoid monthly repayments with a HESA. To qualify for a HESA, you will need sufficient value in your property and a stable financial outlook. 

7. Personal Loan 

A personal loan is an unsecured loan. Unlike a mortgage, a personal loan is unsecured and relies solely on your creditworthiness for approval. You’ll receive a lump-sum payment of the approved amount and will repay it with interest over one to seven years. The interest you pay will depend on your creditworthiness and the loan amount. 

A personal loan is a good option for debt consolidation, home improvements and major expenses. You need an excellent credit score and a manageable debt burden to qualify. Stable employment with a regular income is also needed. 

8. Personal Line of Credit 

A personal line of credit (PLOC), like a credit card provides access to funds as you need them. A PLOC gives you a credit limit you can use for ongoing expenses. As you repay the loan, the funds become available for you to use again. You only pay interest on the amount you owe. You must pay a minimum monthly amount like a credit card. The payment amount includes both principal and interest. A PLOC is a great option for covering unexpected and occasional large expenses. 

9. Credit Card

Credit cards can provide quick and easy funds. They give you a revolving line of credit up to a limit. You pay interest on the amount you use but the interest is significantly higher than the rate you would pay on a secured loan. Credit cards are a good option for short-term expenses and unexpected costs. You will need a good credit score, a regular income and a manageable debt burden to qualify.

Find a Loan that Suits You 

To source much-needed funds, you can find a home-equity loan or a  HELOC alternative. Consider your financial goals when exploring the alternatives. While some options may offer ready funds, they may carry high interest rates. Others may provide access to larger sums but with stricter loan qualifications or shorter repayment terms. Weigh the pros and cons.

Frequently Asked Questions