HELOC Alternatives: Which is Best?
Looking into a HELOC, but not sure it’s the best option for you? It may or may not be, especially if a HELOC alternative can give you a better benefit as a borrower.
The right choice will all depend on your specific and unique situation. (See our chart below)
But before looking at comparisons and alternatives, let’s define what a HELOC actually is. HELOC stands for home equity line of credit, and it’s a type of capital you can access by putting up the equity in your home as collateral.
Once a lender issues you a home equity line of credit, you can borrow against it at any time. You only pay interest on what you borrow (not the full amount available), and your line of credit terms will determine when you need to repay the balance in full.
HELOCs are sometimes a good option for people who want the flexibility of being able to borrow money when they want without having to deal with a large lump sum of cash all at once — and who also want the flexibility of repaying the money they borrowed on their own terms.
Four Alternatives to HELOCs
While HELOCs are great for some people, they do come with downsides. For one, the interest rates will usually vary because they’re adjustable. Other financing options come with fixed interest rates, meaning you always know what you’ll owe when it’s time to repay what you borrowed.
And it might be hard to manage yourself around that available money. While other options give you a set amount based on what you request, a line of credit is always there to dip into while it’s open — and that might be too much temptation for some people to face.
HELOCs are not the best option for everyone. There are other solutions that allow you to tap into your home equity and let you leverage an asset you already own, but that work just a little differently than a line of credit. Here are 4 options to consider:
1. Regular Home Equity Loan
A home equity loan is a loan you take out with your home equity as the collateral. This makes it a secured loan, which is easier to get than an unsecured loan (especially if your credit score isn’t the best).
When you get a home equity loan, you receive the total amount you want to borrow all at once in a lump sum. You can use that cash however you’d like, but it can feel like a lot to manage — especially if you know you want to use the money over time for more than one project.
You also need to repay the lump sum with interest in monthly payments. This gives you less flexibility than a HELOC (where you can withdraw and pay interest on only what you need), but it does provide some stability, since you know you need to make those payments each month at the same interest rate.
2. Home Improvement Loan
A home improvement loan is like a home equity loan, in that a lender provides you with a lump sum of money that you must repay each month with interest. But a home equity loan assumes you have, well, equity in your home.
Not all homeowners have enough equity to quality for a HELOC or a home equity loan. If you want to borrow funds to pay for a renovation, remodel, or repair to your property, a home improvement loan may be a better option.
You need to be ready to explain the specifics of your home improvement project to a lender, and explain exactly how you’ll use the money they let you borrow to add value to your home. You might also need to be prepared to pay a higher interest rate if your home improvement loan is unsecured.
In a way, that’s an advantage: you don’t need to put your home on the line as collateral, but you’ll pay a premium since it presents a higher risk to the lender.
3. Cash-Out Refinance
A cash-out refinance is a type of refinance that you can do on your existing mortgage. A lender will originate a brand-new mortgage for you – and allow you to take out home equity in the process. You will wind up with a bigger loan than you currently have, but with cash in your pocket.
The extra money can be used for anything you want, but people often use if for home improvements, paying for college tuition, or investments.
Keep in mind that refinancing comes with most of the fees and closing costs that your first mortgage came with, which could make this an expensive option if you don’t plan to stay in your home for a long period of time.
It also is worth noting that your interest rate will likely change with a mortgage refinance – either up or down. If you get a significantly lower rate on the new mortgage, a cash-out refinance could be a way to save money in the long run while allowing you to get the money you need from your home’s equity.
4. Home Ownership Investment
Some homeowners don’t want the additional costs of more debt on top of their existing mortgage loan. They don’t like the idea of having additional monthly payments.
If that’s you, there’s one more HELOC alternative to consider: Unison’s HomeOwner Program. With the program, Unison invests with homeowners and eliminates the need for new mortgages, monthly payments, and interest charges.
Homeowners who qualify get a portion of their home equity to use however they’d like over a period of up to 30 years. This money is not a loan, but an investment in your home. In exchange for helping you leverage your equity, you’ll provide Unison with a share in the appreciation of your home when you decide to sell it.
Comparing the Options When It Comes to HELOC Alternatives
Still not sure which option is best for you? Let’s recap by evaluating the alternatives side-by-side:
|Type of Financing||What It Is||Advantage||Disadvantage||Who’s It Best For?|
|HELOC||A line of credit tied to the equity in your home||Provides flexibility; you can borrow only what you need and repay it over a more flexible term||It can be hard to manage, especially if you don’t have good habits around credit and spending (and the interest rate is usually variable)||Homeowners with equity who are responsible stewards of their personal finances who want to tap into their equity here and there over time|
|Home Equity Loan||A borrowed amount of money you receive as a lump sum||Offers more structure and comes with a fixed interest rate||You have to pay interest on the total amount you borrow, even if you don’t need the full amount||Homeowners with equity who want to tackle a specific project that has a fixed cost and have a plan to repay the loan|
|Home Improvement Loan||A borrowed amount of money received as a lump sum that is not tied to the amount of equity you have||You don’t need equity to access financing, and you don’t have to put your home up as collateral||Interest rates may be higher, and qualifying can be harder; you’ll need a good credit score||Homeowners who have good credit but haven’t had time to build equity in their homes yet|
|Cash-Out Refinance||A new mortgage on your home, for up to 85% of your home’s value, which allows you to have extra cash in your pocket after the refinance||Offers a lower interest rate than equity loans and lines of credit, and can save you money on your mortgage if your previous home loan had a high interest rate||You’ll end up with a brand-new mortgage with new terms — and you’ll have to pay the fees associated with that||Homeowners that don’t mind adding secured debt to their home in exchange for a lump sum and potentially a lower interest rate|
|Unison HomeOwner||An offer to invest in your home alongside you||You can tap your home equity without having to make monthly payments or pay interest charges||You will share with Unison the appreciation in your home when you sell — but Unison shares in the depreciation, if your home loses value||Homeowners who want to invest alongside a partner in exchange for sharing in the home’s appreciation at the sale|