Alternatives to a HELOC

People discussing alternatives to a heloc with an advisor

Home equity lines of credit or HELOCs have long been a popular method for homeowners to access their home’s equity and turn it into cash. Historically, HELOCs have low interest rates, and the interest may be tax-deductible, but they aren’t always the best option or available to everyone.  

The following alternatives to a HELOC are meant to give an idea of the available loan types and should not be considered advice. Before embarking on any major financial arrangement, it is essential you consult with a financial professional and make sure you fully understand the terms of what you are embarking on.

Personal Loans 

Personal loans come in secured and non-secured varieties. For both types of loan, payments are made in regular installments similar to credit card payments. These loans usually come with a significant interest rate. 

Non-secured loans are given based on the strength of a borrower’s credit rating. Secured loans require a piece of collateral like a boat, car, or stock. If you fail to repay the loan, the lender can use your collateral to settle the debt.  

Home Sale Leasebacks

Home sale leasebacks are a newer option for homeowners. Essentially, an investor buys the home and gives the borrower the option to continue to live there and pay rent. This isn’t a loan or a mortgage, it is a contract. 

This arrangement allows a borrower to access equity without making payments on a loan. Sometimes the contract gives the seller the option of buying back the home at the end of the agreement. Though they get to remain in the home, the borrower no longer owns it, and now has to pay rent to live there. On the upside, these contracts allow people to access a greater amount of cash than might be available through other HELOC alternatives. They get to benefit from the sale, and remain in the home without the responsibility property taxes or maintenance. There are also no credit or income qualifications.

Be sure to check out the exact terms of any home sale leasebacks and weigh them carefully against selling the home outright or using another home equity loan product. It’s also important to remember that once entering into this agreement, the borrower ceases to own the home and loses the ability to benefit from equity it accrues after the sale.  

Home Equity Sharing Agreements 

Shared equity agreements allow homeowners to access home equity without paying interest or monthly payments. They are a financial agreement that allows another party to invest in a property and acquire a stake in its future equity.  

The participating homeowner receives a lump-sum payment. The investor then gets a portion of the future equity of the home. There are no monthly payments or interest. This less traditional method of accessing equity has pros and cons. While borrowers do get access to current available equity, at the end of the agreement, they are responsible for repaying the original amount taken out plus a portion of the equity the home earned over the duration of the contract. In other words, the more the home appreciates in value, the more the will borrower will owe at the end of the loan period.

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Cash-Out Refinance 

A cash-out refinance allows borrowers to refinance a mortgage and pull out a certain amount of equity as cash. For instance, a home worth $500,000 with a mortgage of $150,000 has $350,000 in equity. Taking a cash-out refinance loan of $300,000 would allow the borrowers to pay off the $150,000 mortgage and use the lump sum of $150,000 for any purpose. The new mortgage would be for $300,000.

If a borrower’s interest rate isn’t as low as the current interest rates, this may be a good option to secure a lower rate for your mortgage in addition to taking out cash. Rates for cash-out refinances are usually lower than a home equity loan or HELOCs, however, there are fees and closing costs associated with these loans that should be considered.

Reverse Mortgage 

A reverse mortgage may be an option for homeowners aged 62 or over.

For homeowners who fit the age requirement, own their home outright, or have considerable equity, a reverse mortgage can offer a way of accessing equity as a lump payment, monthly installments, line of credit or combination of the three. Payments are not made on the loan until the last borrower dies, moves to a care facility, or the home is sold. However, borrowers are responsible for property taxes, homeowner’s insurance, and maintenance of the property. It is also required that borrowers live in the home for the majority of the year and fulfil other obligations outlined in the loan agreement. 

The home equity conversion mortgage (HECM) is a popular type of reverse mortgage loan that comes with consumer protection safeguards and capped origination fees. While there are risks and complexities to a reverse mortgage, weighing its pros and cons to leverage the equity in your home may be worth a look. 

Reverse Mortgage Line of Credit 

Unlike a regular home equity line of credit, a reverse mortgage line of credit is irrevocable, meaning it can’t be canceled or revoked even if the value of the home declines. When you take out a reverse mortgage line of credit, the funds you have reserved for future use begin earning interest for you, whether or not you choose to use them.

For all alternatives to a HELOC, a borrower’s unique circumstances will determine which choices are available and which is the best course to pursue. Speaking with a qualified financial advisor is essential to fully understanding the options and making the best choice for your financial future.