8 HELOC alternatives to know

A home equity line of credit (HELOC) is a revolving credit line secured by the equity in your home. It lets you borrow, repay, and re-borrow funds up to a credit limit, which is usually a percentage of your home’s appraised value minus whatever you still owe on your mortgage.

Though HELOCs can be a flexible way to tap into your home equity, they’re not for everyone. In this article, we’ll explain eight HELOC alternatives you may want to consider, including home equity loans and cash-out refinances, so you can make more informed borrowing decisions.

Why consider HELOC alternatives?

A home equity line of credit isn’t a perfect fit for everyone, despite its many benefits. For one thing, a HELOC can make budgeting difficult for some people. The rates are variable, meaning that their interest rates can fluctuate. Plus, due to how repayments work for HELOCs, you have to be prepared for the balance to freeze and then pay back both principal and interest at the end of the draw period.

With this in mind, borrowers seeking to use their home as a source of financing should consider alternatives. For example, a home equity loan offers a fixed interest rate. Another option is a cash-out refinance, which can offer better rates and repayment options, depending on the results of your blended rate calculation.

Then there are options for those who don’t want to touch their equity or want to avoid a loan payment. It’s important to make sure you understand your situation and evaluate each scenario before making an important financial decision.

8 alternatives to HELOCS: At a glance

8 alternatives to HELOCs: In detail

Below are eight alternatives to HELOCs, how they work, and who they’re a good option for. This information is for educational purposes only and shouldn’t be considered financial advice.

1. Home equity loan

It can be confusing when comparing a HELOC to a home equity loan. A Home Equity Loan, like 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. A home equity loan’s interest rate tends to be fixed rather than a variable rate that could fluctuate monthly.

How it works

A home equity loan requires up-front costs like a cash-out refinance does. The difference is that, unlike a cash-out refinance, you keep your primary mortgage in addition to the new loan. You might want to do this if your existing mortgage has a low rate and, rather than refinancing to a higher interest rate, it makes more sense to take out a second loan.

The rate on a home equity loan is typically higher than what you could get if you were to refinance your primary mortgage. The reason is that the primary mortgage holder has a first lien position. This means the primary mortgage holder will be 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 the current rate for a cash-out refinance.

Who it’s a good option for

A home equity loan can be used to cover a wide range of expenses — from home improvements and education costs to unexpected medical bills and more. While there are very few restrictions on how you can use the funds, it’s wise to think carefully before spending on nonessential purchases, since your home is on the line.

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 refinances, it’s the same as when you compare it to a home equity loan.

How it works

A cash-out refi works by increasing the balance on your primary mortgage, becoming a new loan with a different interest rate and potentially a longer or shorter term. You’ll be given a lump-sum payment like a home equity loan, but you have only one mortgage payment moving forward.

Who it’s a good option for

It’s a good idea to compare your options using a blended rate calculation. If the interest rate you’ll receive by taking cash out is lower than the combined average you’d get if you had a second mortgage, taking cash out on your primary loan may make the most sense.

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

3. Personal loan

A personal loan provides 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 like a HELOC, which is secured by your home.

How it works

A personal loan is a loan without collateral. Lenders are making decisions solely based on your creditworthiness. 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 previously. You also must have really good credit.

Who it’s a good option for

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

4. Credit card

A credit card is a revolving credit line that lets you borrow, repay, and borrow again up to a certain credit limit. It offers a convenient way to make purchases online and in stores, and when used responsibly, it can help you build strong credit.

How it works

When you make a purchase with a credit card, the amount is charged to your account and lowers your available credit. However, you can restore your available credit by repaying what you owe.

Keep in mind that if you don’t pay off your credit balance in full each month, you may be charged interest, often at a high rate. To avoid these charges, it’s best to pay off your balance as soon as possible.

Who it’s a good option for

Credit cards offer a revolving line of credit similar to a HELOC, but without the risk of losing your home. Because they’re typically unsecured (meaning they’re not backed by collateral), they pose less risk to your assets — though they usually come with significantly higher interest rates.

5. Reverse mortgage

A reverse mortgage may be a good option if you’re an eligible senior who has considerable equity in your 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. We’ll explain.

How it works

A reverse mortgage is designed for homeowners age 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 borrowers to take monthly payments over a specific term or during their lifetime, plus it can be used as a line of credit. 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). 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 up the home: A reverse mortgage is a nonrecourse loan, meaning your heirs can’t be held responsible from legal or credit standpoints if they just choose to give the home back to the lender.

Who it’s a good option for

Reverse mortgages are a good option for those who are 62 or older and have significant home equity. However, before applying for one, consider the pros and cons. For example, while a reverse mortgage can help fund your retirement, it also leaves you with less to bequeath to heirs.

6. Home equity sharing agreement

A home equity sharing agreement (aka a home equity investment or HEI) lets you receive a lump-sum cash payment by giving up a share of your home’s future value. When you sell the property, the investor receives a portion of the proceeds based on their agreed equity share.

How it works

Home equity sharing agreements have the benefit of not requiring a monthly payment. However, the downside is that if your home appreciates, you could end up owing a lot more than you received. As a result, these agreements can be both flexible and risky.

Who it’s a good option for

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

7. Sale-leaseback

A sale-leaseback agreement (also known as a rent-back agreement) involves selling your property and 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 for a longer term in some scenarios.

How it works

Essentially, a sale-leaseback is two transactions in one. First, you sell your property to an investor. Then the investor leases the property back to you under a long-term rental agreement, turning you into a tenant and them into your landlord. This way, you can sell your house without having to move. 

However, you must keep in mind that you’re giving up ownership of the property and the equity and control that goes with that.

Who it’s a good option for

A sale-leaseback may work for someone who needs to liquidate their home equity but doesn’t want to move.

8. Personal line of credit

A personal line of credit is a revolving credit line offered by banks and credit unions that works much like a credit card. The main difference is that it has two phases: a draw period and a repayment period.

How it works

During the draw period, you can borrow money up to a set credit limit and repay the debt to restore your available credit. Once the draw period ends, you enter a repayment period, during which you must pay off any outstanding balance along with interest.

In short, personal lines of credit offer flexible financing but usually come with variable interest rates and fees that can drive up costs over time.

Who it’s a good option for

A personal line of credit might make more sense than a HELOC if:

1. You have an ongoing project that you don’t know the total cost of
2. You don’t want to access your home equity
3. You don’t qualify for other types of equity lending products

The bottom line: Find an alternative for a HELOC that’s right for you

Ultimately, while a HELOC can be a flexible way to tap into your home equity, it’s not the only option. From home equity loans and cash-out refinances to personal loans, credit cards, reverse mortgages, and innovative solutions like home equity sharing and sale-leaseback agreements, you have many borrowing options to choose from.

The right choice depends on your goals, timeline, and risk tolerance. To explore which best meets your needs, talk with a Rocket Mortgage® Home Loan Expert. They can help you compare HELOC alternatives and find a financing solution that works for you.

Refinancing may increase finance charges over the life of the loan.