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Home Equity

Alternatives to Home Equity Loans or HELOCs

Updated May 09, 2023   |   13 mins read

If you are a homeowner and need cash to fund home repairs or a large purchase, a home equity loan or home equity line of credit (HELOC) can be a great borrowing option.

These options do have drawbacks, though. Both forms of credit usually have some type of origination or closing fees, and both also use your home as collateral, meaning you risk losing your house if you can’t make your payments.

If you don’t want to take that risk or pay those costs, there are a number of alternatives that might be a better fit. Read on to learn more about each one.

In this guide:

When should you consider home equity loan and HELOC alternatives?

Though HELOCs and home equity loans can be convenient ways to access cash, they’re not always the right fit. If you’re tight on savings, for example, you may not be able to comfortably afford the closing costs and other fees these lending options typically come with.

These options also might not be wise if your income is inconsistent. This could make it hard to make your payments and might put you at risk of losing your house. The decision to tap into your home’s equity really depends on your tolerance for risk, your financial situation, and your own personal preferences. 

You should also consider how you’ll use the funds and what your tax goals are. With home equity loans and HELOCs, you can only write off your interest costs as long as the funds go toward improving your home. If you use the funds for anything else, there are no tax advantages to these loans.

Fortunately, if you end up deciding that a home equity loan or HELOC is not for you, there are several alternatives you may be able to use for cash in their place. Here are a few you may want to consider.

Personal loans

A personal loan is one alternative you can consider. These unsecured loans can be used for any purpose. You typically won’t see closing costs on these loans, and while their interest rates are higher than those you’d see on home equity loans, they are typically lower than those on most credit cards. 

Unlike HELOCs and home equity loans, personal loan amounts aren’t based on your home’s equity. Instead, the amount you can borrow with a personal loan depends on your income, credit history, and credit score. 

As far as repayment goes, you’ll usually need to repay a personal loan faster than you would a home equity product, typically within one to seven years. If you miss payments, you don’t have the risk of the lender taking your home, though of course, doing so could still hurt your credit. 

Need help finding a lender? Compare our picks for the best personal loans.

Home equity loan vs. personal loan

Personal loan rates tend to be higher than rates on home equity loans simply because the loan is unsecured (the lender doesn’t have any collateral to seize if you stop making payments).  There also aren’t typically closing costs on personal loans (though there may be a single origination fee), and you usually need to pay the money back much faster. Home equity loans often come with repayment terms of 30 years, while personal loans last around seven years at most. 

Home equity loanPersonal loan
Interest ratesLowerHigher
Collateral?Yes, your houseNo, unsecured 
Repayment termsUp to 30 years1 – 7 years
Closing costs? YesUsually no, but there may be an origination fee

Home sale leasebacks

Home sale leasebacks are a newer product that, for certain homeowners, may be a good alternative to home equity loans and HELOCs.

With a home sale leaseback, you sell your house to a company but continue to live there by paying rent. And some companies allow you to buy your home back down the line.

The benefit of home sale leasebacks is that you don’t have to make payments on a loan (or interest), and you can typically access larger amounts of money than you could with other options. There are also no strict credit or income requirements. 

The downside is that you no longer own your home, and you have to pay rent.

You can learn more about how these work and see options in our home sale leasebacks guide.

Home equity loan vs. home sale leaseback

The biggest difference between a home equity loan or HELOC and a home sale leaseback is that in the latter, you no longer own your home. Instead, you sell it to a company and then rent the home back from them. There is also no interest charged on leasebacks, and you don’t take on any sort of debt to use one. Finally, leasebacks also allow you to access large sums of cash. You get the entire sale price for the home, rather than just a small portion of your equity.

Home equity loanHome sale leaseback
Adds debtYesNo
Loan amountTypically up to around 80% of your home’s value, depending on the lender, minus your current mortgage balanceYour home’s full sale price
Who owns the homeYouLeaseback company
TermsUp to 30 years12-month lease, renewable, can buy back your home at anytime

Home equity sharing agreement

With a home equity sharing agreement, a company gives you money upfront in exchange for a portion of the proceeds of your future home sale. The company is essentially investing in your property while allowing you to access your home equity simultaneously.

Like a home sale leaseback, there are no monthly payments or interest costs with equity sharing agreements. You pay the money back, plus a portion of the equity gained, when you sell the home or buy out the investment. This usually needs to be done within 10 to 30 years, depending on the company you use. 

To learn more, read our home equity sharing agreements guide.

Home equity loan vs. home equity sharing agreement

Home equity loans and HELOCs entail borrowing money, and paying interest to do so. Home equity sharing agreements, on the other hand, are more like bringing in an extra investor on your property. They share in any growth or loss in your home’s value, and they give you a lump sum of cash in return for that stake.

This may or may not be more expensive than a home equity loan. If your home appreciates a large amount by the time your term ends, you could owe a hefty share of your profits to the equity sharing company.

Both home equity loans and home equity sharing agreements come with fees. These vary by company, but with home equity sharing, you’ll generally pay about 3% of the total payment amount you receive.

Home equity loanHome equity sharing agreement
Closing costsYesYes
Monthly paymentsYesNo
Adds debtYesNo
Takes a share of your home’s future value/profitsNoYes
Repayment termUp to 30 years10 to 30 years

Cash-out refinance

Another viable alternative to a home equity loan or HELOC is a cash-out refinance. When you do a cash-out refinance, you refinance your primary mortgage for more than you currently owe and receive the difference in a lump sum.

For example, if you owe $100,000 on your mortgage and refinance it to $150,000, you would receive $50,000 in cash. You would then make monthly payments on your new mortgage and could use the cash as you see fit.

A cash-out refinance may be a good option if you are eligible for rates that are lower than you are currently paying on your mortgage. Your new rate may also be lower than what you would receive on a home equity loan or HELOC.

Both cash-out refinances and home equity products have closing costs, but those on cash-out refinances are usually higher. Be sure to compare the total long-term costs of each to decide which is a better option for you.

Home equity loan vs. cash-out refinance

A home equity loan is a type of second mortgage. It comes with a second payment in addition to your current mortgage — meaning you’ll owe two payments per month. Cash-out refinances are different. They replace your current mortgage with a new one, so you’ll have just one payment moving forward.

While both options come with closing costs, you’ll typically pay more on a cash-out refinance than you will on a home equity product. The interest rate, however, will typically be lower. It may also allow you to reduce the rate on your existing mortgage and save on long-term interest costs.

Home equity loanCash-out refinance
Type of mortgageSecond; comes with an additional monthly paymentFirst; replaces your existing mortgage
InterestTypically higherTypically lower; may also allow you to reduce your current mortgage rate
Loan amountTypically up to around 80% of your home’s value, depending on the lender, minus your existing mortgage balanceTypically up to around 80% of your home’s value, depending on the lender
Repayment termsUp to 30 yearsUp to 30 years

See our guide to home equity loans vs. cash-out refinancing to learn more.

Credit Cards

Credit cards offer a line of credit that is similar to a HELOC. While this makes borrowing for any purpose easy, it is also quite expensive. Average credit card interest rates are typically well above 10% — much higher than the rates on home equity loans, mortgages, and even personal loans.

Credit cards can be good if you need a large amount of money or a continuous stream of funds over time, but it’s best to pay any charges off within a few months. If you can’t, you may incur hefty interest fees and could find yourself in a vicious cycle of debt quickly. This could also adversely impact your credit score.

On the upside, if you already have a credit card you can use, you won’t need to go through a lengthy application process, and there are no upfront financing costs either.

Home equity loan vs. credit cards

There are many differences between home equity loans and credit cards. For one, home equity loans give you a single, lump sum amount, while credit cards offer access to continuous cash over time. 

Additionally, credit cards have much higher interest rates and can often result in expensive long-term interest costs, especially if you don’t pay your balances off quickly. Home equity loans, on the other hand, offer a lower interest rate and a set monthly payment, allowing you to pay off your balance over many years. 

Home equity loanCredit cards
Interest ratesLowerHigher
Loan amountSingle, upfront payout

Determined by how much equity you have in your home
Access to revolving credit line over time

Determined by your credit score and income
RepaymentMonthly; up to 30 yearsMonthly; quick pay-off is key to reining in interest costs

Manufacturer and dealer financing

If you are buying something like a car, truck, boat, or RV, the manufacturer or dealer may offer their own form of financing. Depending on the product and expense, they may offer repayment terms of seven to 10 years. 

Loans from a manufacturer or dealer are secured, meaning they can seize the property you financed with them (the car, for example) if you don’t make your payments.

Interest rates on these loans are dependent upon your credit score, the product, and the size and reputation of the dealer or manufacturer. They may sometimes even be less than the interest rates on home equity loans or HELOCs, if you are able to qualify for a promotional deal.

Manufacturers offer very low interest rates, sometimes as low as 0%, as marketing incentives on new vehicles. In cases like this, manufacturer financing could be a far better option than a home equity product — as long as you can pay off the balance before any promotional rate expires and your interest costs rise.

Home equity loan vs. manufacturer and dealer financing

Both home equity products and manufacturer financing are secured loans. They put your home, car, boat, or RV on the line, and if you don’t stay on top of payments, you could lose them to foreclosure or seizure.

Dealer financing has the potential for lower interest rates, but sometimes, these are promotional rates only. You’ll want to be clear on the fine print and when any interest rate hike may occur in the future. You should plan to pay off your balance — or refinance — before this point to avoid an increase in payments. 

Home equity loansManufacturer and dealer financing
Interest ratesMay be higherMay be lower — at least at the start
TermsUp to 30 yearsUp to 10 years
Loan amount Typically up to around 80% of your home’s value, depending on the lender, minus your current mortgage balanceThe full sale price of the product you’re purchasing, minus any down payment

How to determine which product is best for your situation

Home equity loans, HELOCs, and every home equity loan alternative comes with its own benefits and drawbacks, so it’s important to consider your options carefully. 

To recap, here’s when each home equity loan and HELOC alternative would be best used:

  • Credit card: This can be good if you need cash fast or over an extended period — but only if you can pay off your charges in short order. Credit cards can be particularly helpful if you already have an account open and don’t need to apply again.
  • Cash-out refinance: This might be a good option if you’re able to get a lower interest rate than you have on your current loan. It can also help if you’re looking to borrow money without taking on a second monthly payment.
  • Sale leaseback or home equity sharing agreement: If you don’t want any monthly payments — or interest — these can be options to consider. They also don’t add any long-term debt.
  • Personal loans: Personal loans can be smart if you don’t want to use your home as collateral. 
  • Dealer/manufacturer financing: This option is best if you’d use the funds from your home equity loan or HELOC to buy a car, boat, or other similar purchase. Just be wary of promotional interest rates.

Always weigh your personal finances and goals, and factor in the long-term risks and costs of borrowing, too. Finally, make sure to consider at least a few lenders or investment companies when moving forward. This will ensure you get the best deal.