8 HELOC Alternatives To Know

A home equity line of credit (HELOC) enables you to access cash based on your home value without having to refinance your primary mortgage. It can also be convenient because it allows you to take funds out and put them back during the draw period so they can be used for multiple purposes. But it’s not always the best choice. You may be looking for a HELOC alternative.

Although Rocket Mortgage^® doesn’t offer a HELOC, there are plenty of other options that serve a similar purpose.

8 Alternatives To HELOCs

The ultimate goal of a HELOC is to convert your home equity into a line of credit that can be used over time to accomplish a variety of goals, but there are many other ways to make this happen.

1. Home Equity Loan

There can be confusion when it comes to comparisons of HELOCs versus home equity loans. A Home Equity Loan, like the one from Rocket Mortgage, is a second mortgage like a HELOC, but you get the funds in a lump-sum payment rather than as a line of credit.¹ The interest rate tends to be fixed or adjustable rather than a variable rate that could fluctuate monthly on a HELOC.

How It Works

A home equity loan has the same upfront payment that a cash-out refinance would. The difference is that because it’s a second mortgage, you keep your primary mortgage in place. You might want to do this if you had an existing low rate and the math made it make more sense to take a second loan than to refinance your current one.

The rate on a home equity loan will always be higher than what you could get if you would refinance your primary mortgage because the primary mortgage holder has first lien position. This means they get paid before the lender on the second mortgage if you default on your payments.

How do you know if a home equity loan or HELOC is better than refinancing? A Home Loan Expert will help you with something called a blended rate calculation by comparing  the weighted average interest rate you will receive with a second mortgage to current rates for a cash-out refinance. If the blended rate is lower, go with a home equity loan or HELOC.

Who It’s Best For

Home equity loans have a variety of uses. Like a HELOC, you can spend the money in whatever way you wish. However, one difference is that this might be good for people who have the funds earmarked for a specific project because you get all the funds at once. With a HELOC, you can take the money out and put it back as much as you want in the draw period.

Pros

There are several pros and cons of home equity loans. Let’s start with the benefits:

• Don’t have to refinance: If it makes sense from a math standpoint, you can keep your primary mortgage and get a lower blended rate than you would if you are refinancing and took a bigger balance.
• Lump-sum payment: You get all the funds upfront which can help with getting projects started on time. It’s good if you have your budget in mind in advance.
• Mortgage insurance may be tax-deductible: Mortgage insurance on your home equity loan may be tax-deductible as long as the mortgage is used to buy, build or improve the home.

Cons

Higher interest rate than primary mortgage: Because of the lien position, you’ll receive a higher interest rate on a home equity loan than you would on a primary mortgage. Your Home Loan Expert will help you with a blended rate calculation to make sure it doesn’t make more sense to refinance.

Two mortgage payments: If you go this route, you have to make payments each month on both your primary mortgage and the home equity loan.

2. Cash-Out Refinance

A cash-out refinance is similar to a home equity loan except you take out a bigger balance on your primary mortgage. When you consider a HELOC versus a cash-out refinance, it’s the same as when you compare to a home equity loan.

How It Works

A cash-out refi relies on taking out a bigger balance on your primary mortgage. It’s a new loan with a different interest rate and potentially a longer or shorter term. It’s a lump-sum payment like a home equity loan, but you only have one mortgage payment moving forward.

Who It’s Best For

Whether this or a home equity loan or HELOC makes sense all comes down to a blended rate calculation again. If the interest rate you will receive by taking cash out is lower than the combined average you would get if you had a second mortgage, taking cash out on your primary loan makes the most sense.

Beyond that, it’s good if you’re comfortable getting all your funding at once rather than using it over time for several projects.

Pros

Now that we’ve touched on the basics, let’s run through the pros and cons of refinancing:

• Lower interest rate compared to second mortgage: The interest rate is going to be lower than on a home equity loan or HELOC given the primary lien position. A blended rate calculation will help you determine whether this is the right option.
• One payment: You don’t have to worry about multiple house payments each month.
• Interest may be tax-deductible: Because this is a mortgage, the interest may be tax-deductible, up to a limit as long as the money is used for buying, building or improving on a home.

Cons

• It’s a brand-new mortgage: This may or may not be a negative. It depends on how low your interest rate was prior to refinancing. Again, be sure to have someone do the math on that blended rate calculation.
• Not as flexible: A HELOC allows you to potentially use the same funds many times over by paying them back during the draw period. But a cash-out refi is one pool of money. Once you use it, it’s gone.

3. Personal Loan

A personal loan involves a single pool of money like a cash-out refinance or home equity loan. The difference is that the funding is unsecured. There is no collateral for a personal loan versus a HELOC, which is secured by your home.

How It Works

A personal loan is a loan without collateral. So the lender is making decisions solely based on your credit worthiness. Because there is nothing for the lender to take if you end up defaulting on the loan, the interest rate tends to be higher than either of the options we discussed so far. You also must have really good credit.

Who It’s Best For

To borrow from your house, you need to have a fairly high amount of existing equity because you have to leave some equity in the home even after the loan closes. Because of this, home equity loans and cash-out refinances aren’t necessarily going to help everyone accomplish their goals.

Pros

• No collateral: Because the loan isn’t tied to your home, you don’t have to worry about coming in at a certain value with an appraisal to accomplish your goals.
• Faster approval: Because you don’t have to wait for an appraisal, you can be approved faster. It may only take a few minutes if you have your documentation ready. You may be able to get same-day funding.
• Apply without impacting your credit: Personal loan approvals often feature a soft credit check, meaning your credit isn’t impacted if you’re just looking at your options. Lenders typically do a hard pull only when you accept the loan.

Cons

Higher interest rate: Because the lender has no collateral backing up the loan, the rate is going to be higher than any of the options where the loan is backed by your house.

Short-term loan: This could be a pro or con depending on how you look at it, but these are shorter-term loans meaning the monthly payment can be quite high.

Limited borrowing power: Because there’s limited recourse for the lender if you default, you typically can’t receive as much funding as you could with other loans. Our friends at Rocket Loans^® fund up to $45,000 for personal loans.

4. Credit Card

A credit card can be a viable alternative to a HELOC if you don’t want to take out a loan or impact your home equity at all.

How It Works

It’s a line of credit, so it works as a HELOC would in that sense except that the balance doesn’t freeze with a credit card. The balance also changes every month depending on your personal spending and payment cycles. The provider sets your limits based on factors like your income and prior credit history.

Who It’s Best For

A credit card might make more sense than a HELOC if you don’t want to touch your home equity and you have projects you know you can pay off in a short period of time. You don’t want to carry a long-term balance on credit cards because the interest can really add up.

Pros

• Cash advances available: For those who don’t take credit cards as a form of payment, you can get a cash advance to write checks against your credit card.
• Convenient: If you have a credit card for which the limits fit your project, you don’t have to be approved for any new funding, so this is among the fastest options available.
• Rewards points: Credit card companies can have some pretty compelling rewards offerings if you use your card frequently to purchase goods and services. The Rocket Visa Signature Card has points that can be redeemed by Rocket Mortgage clients and used toward their mortgage payment or even the down payment on a new home.

Cons

• Highest interest rates: Because the balance on these rolls over and continues to change each month, they have some of the highest interest rates that are most sensitive to the market. Whenever possible, you should always pay off the balance each month.
• Can’t always use a credit card: The primary way that credit card companies make their money is to charge businesses a service fee for accepting and processing the payment. Some businesses don’t accept credit card as a form of payment for this reason.

5. Reverse Mortgage

A reverse mortgage may be a good option if you’re an eligible senior who has considerable equity in their home and doesn’t want to deal with a mortgage payment. We’ll discuss a reverse mortgage versus a HELOC, but you may be able to have both as well. We’ll explain.

How It Works

A reverse mortgage is available for homeowners 62 and older who have significant equity in or own their home outright. It enables you to access your equity without having a mortgage payment. Nothing has to be paid off until the youngest surviving borrower or non-borrowing spouse passes away or moves out of the home.

It allows for you to take monthly payments over the course of a specific term or during your lifetime, as well as a line of credit option. It can also be used to buy a new house as long as you cover the down payment and closing costs.

During the qualification process, you’ll go through a financial assessment to make sure that you have the money for property taxes, homeowners insurance, maintenance and homeowners association dues (if applicable). Here’s a full rundown of reverse mortgage requirements.

When it does come time to pay the loan back, there are three options:

• Sell the home: This is a great option if you don’t have heirs who want the home. If there’s anything left over after the sale, your heirs keep it.
• Refinance the home: If someone wants to keep the home, they can either pay off the balance or refinance the home to a forward mortgage for 95% of its appraised value or the balance of the reverse mortgage, whichever is less.
• Give the home up: A reverse mortgage is a nonrecourse loan, meaning your heirs can’t be held responsible from a legal or credit standpoint if they just choose to give the home back to the lender.

Who It’s Best For

This makes the most sense for seniors who have significant equity in their home and want to access it without having a mortgage payment.

Pros

• No mortgage payment: You can access existing equity in your home without having to make a mortgage payment moving forward. Nothing is required to be paid back until the last borrower or non-borrowing spouse passes or moves out of the home.
• Flexible disbursement options: Depending on what you’re looking for, there are many payment options. You can elect to receive payments for as long as the youngest borrower lives or for a fixed term. You may also elect to take a line of credit alone or in combination with either the lifetime or term payments option.
• Funds can be used for purchase: If you can cover the down payment and closing costs, a reverse mortgage can be used to buy a new home

Cons

• Must have significant equity: Ideally, you either own the home free and clear or you have significant equity because the reverse mortgage is initially used to pay off your existing mortgage. If you don’t have enough funds left over after this, a reverse mortgage may not accomplish your goals.
• Can complicate inherited property: If your heirs want to keep the property, they have to come up with the money to pay off the loan or refinance the property into a traditional mortgage.
• Financial assessment: While you won’t have a mortgage payment, you will have to show you can afford to keep up with maintenance, homeowners and hazard insurance, and property taxes. Otherwise, funds are taken out of the proceeds to cover it.

6. Home Equity Sharing Agreement

A home equity sharing arrangement is another way to tap equity in your home without having to deal with a home loan.

How It Works

In a home equity sharing arrangement, you make an agreement with a company to pay you for a percentage of your equity. If the value of your home goes up, they share in that increase in your property value relative to the amount of equity they have in your home. If it goes down, that’s a loss for them and doesn’t harm you.

Who It’s Best For

This is best for someone who doesn’t want to deal with having a mortgage payment in order to access their equity and also doesn’t mind sharing the proceeds of a sale.

Pros

• Access your equity without a payment: Because this isn’t a loan, there’s no monthly payment.
• Share in any losses: If your home does go down in value, the company is the one that loses out on their share of your equity. Because of this, you can use the funds under the agreement without fear of real future penalty.

Cons

• Lose out on some profit in a sale: If you give up part of your equity, you’re giving up on that portion of the profit in any sale.
• Limited borrowing power: Even if you have plenty of existing equity, companies are typically only willing to share a certain percentage of your equity.

7. Sale-Leaseback

A sale-leaseback agreement (also known as a rent-back agreement) involves selling your property, but then executing a rental agreement with the new owners. This is most often used on a short-term basis if you sell your existing home before finding a new home, but it could be used longer-term in some scenarios.

How It Works

A sale-leaseback allows you to access the full value of your home by selling it to someone else. To continue living there, temporarily or otherwise, you would work out a rental agreement. The new owners would become your landlords.

Who It’s Best For

This is most commonly utilized when you sell your old home before buying your new one, either because it just takes longer to find a new one or because you need the funding for a down payment.

Pros

• Flexibility in timing: This could allow you to stay in your home after the sale if you still need to find a new one. The agreements are also good for parents wanting to hold off the move until the end of the school year or those looking for more time to pack up their stuff.
• Fund your next down payment: Selling your house before completing the purchase on your next one allows you to put the funds toward the down payment.
• Long-term agreements are possible: If the new owner wants to be your landlord on a long-term basis, it can be done.

Cons

• Timing assistance has limits: If the new buyer’s loan is based on it being their primary residence, they generally have to move in within 60 days of closing.
• You may have to find the right buyer for a long-term agreement: If you’re looking to rent long-term in your existing home after the sale, you’ll need to find a buyer who wants to take it on and potentially finance it as a rental property.
• It’s no longer yours: If you no longer own the house, any updates that you make have to be approved by the new owners.

8. Personal Line Of Credit

A personal line of credit is just like a HELOC in terms of the way it works, but it’s based on your own credit worthiness rather than anything related to collateral.

How It Works

A personal line of credit is based solely on your past credit history rather than being tied to a home like a HELOC would be. It works similarly to a credit card, but the rates are more in line with personal loans.

Who It’s Best For

A personal line of credit might make more sense than a HELOC if you have an ongoing project for which you don’t know the total cost, but you also don’t want or are unable to access your home equity.

Pros

• No collateral: Because there’s no collateral, you don’t have to wait for an appraisal on any property you might have. You’re also not putting your home at risk.
• Fast funding: Because there’s no appraisal, the funding process can be faster.
• Lower rates than a credit card: This really functions like a credit card, but the rates are potentially much lower, more in line with personal loans.

Cons

• Higher rates than a HELOC: While lower than a credit card, the rate is going to be higher than other options that would be based on collateral.
• Variable rate: Similar to a credit card or HELOC, the rate is going to be variable, meaning it can fluctuate with every payment period.

8 Alternatives To HELOCS: At A Glance

Why Consider HELOC Alternatives?

While a HELOC can be the right choice in many scenarios, it’s not perfect for everyone. For one thing, the rates are variable so they can fluctuate with every decision of the Federal Reserve. Additionally, you have to be prepared for the balance to freeze and be ready to pay back both principal and interest at the end of the draw period.

In addition, if you’re turning to your home as a source of financing, you should always consider a home equity loan if you know how much you need to borrow because the rate is fixed. Depending on the results of your blended rate calculation, a cash-out refinance could be a better option than either of these.

Then there are options for those who don’t want to touch their equity, or even not make a loan payment at all. It’s important to really make sure you understand your situation and you evaluate each scenario.

The Bottom Line

A HELOC should never be the only financing you consider, even if you want to use your home equity. Everything from a home equity loan or cash-out refinance to nontraditional options such as home equity sharing agreements and personal lines of credit could make sense in the right situation.

If you think a cash-out refinance or Home Equity Loan is the right choice for you, you can begin the approval process today.