If you are a homeowner and need some cash to make a big purchase, a home equity loan or home equity line of credit (HELOC) can be a great borrowing option. Both of these home equity products let you borrow against the equity you have already built up in your home.
A home equity loan gives you a lump sum that you repay at a fixed interest rate over a period of around 10 to 15 years. A HELOC lets you access a credit line up to a maximum amount to use when you need the money, and usually has a variable interest rate. You can even pay off your balance and use the credit line over and over again.
Both forms of credit usually have some type of origination or closing fees that vary with the particular lender. They are both secured forms of debt, which means your home serves as collateral for the loan. The benefit to this is that your interest rate is low. Interest rates on home equity loans and HELOCs are only slightly higher than mortgage interest rates.
The drawback to this is that you risk losing your home if you can’t make the payments on your home equity loan or line of credit. So let’s take a look at alternative financing options that might be better for your specific borrowing situation.
Top Alternatives to Home Equity Loans & HELOCs
A personal loan is an unsecured loan the borrower can use for any purpose. The interest rates are higher than they are on home equity loans, but they are typically still a cheaper borrowing option than most credit cards.
Interest rates on personal loans are typically two to three times higher than home equity interest rates. Each lender has its own repayment options, but they typically vary from three to seven years. Since the loan is unsecured, you don’t have the risk of the lender taking your home or other asset if you are delinquent on your payments.
The amount you can borrow with a personal loan is not dependent upon a set amount of money like the equity in your home. Instead, lenders typically make a decision about how much credit to extend based upon your income and credit history.
>> Read More: Best Personal Loans of 2019
Credit cards offer a line of credit that is similar to a HELOC. While this makes borrowing for any purpose easy, it is also incredibly expensive. Average credit card interest rates can vary be between 20% and 30%. They are also typically about twice as high as personal loan interest rates.
Credit cards can be good if you need a large amount of money fast, but it’s best to plan to pay it off within a few months. You won’t need to go through an application process if you already have the account, and there are no upfront financing costs.
Consider avoiding credit cards, however, if you don’t think you can pay off the balance quickly. Since the interest rates are so high, you may pay an enormous amount of money in interest expense and struggle to pay your way out of credit card debt. The high interest expenses are the biggest risk associated with using credit card financing.
>> Read More: Best Credit Cards of 2019
Manufacturer & Dealer Financing
If you are buying something like a car, truck, boat, or RV, the manufacturer or dealer may offer their own product financing. Depending on the product and expense, they may offer repayment terms of two to ten years. Loans from the manufacturer or dealer are secured loans just like the home equity loan.
Instead of being secured by your home, these loans are secured by the product you are purchasing. So, if you get a manufacturer’s loan for a truck purchase, the truck serves as the collateral for the loan. The risk associated with these loans is that the lender will repossess the underlying collateral if you are delinquent on your loan. Most homeowners would probably prefer to lose their car or truck rather than their home, so these loans are somewhat less risky for the homeowner.
Interest rates on manufacturer or dealer loans are dependent upon the borrower’s credit score, the product, and the size and reputation of the dealer or manufacturer. For example, a small car dealer that offers financing might work with a small financial institution that doesn’t offer competitive interest rates. Large manufacturers, on the other hand, usually have large financing divisions that can make competitive loan offers.
The interest rates on these loans can often be less than the interest rates on home equity loans or HELOCs. In addition, manufacturers offer very low interest rates as marketing incentives. These incentives might even offer zero percent financing for several years. In cases like this, manufacturer financing would be a far better option than using a home equity loan or HELOC to finance your purchase.