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There are some downsides that you should consider, however.
Both forms of credit usually have some type of origination or closing fees and both are secured forms of debt, which means your home serves as collateral for the loan. You risk losing your home if you can’t make the payments on your home equity loan or line of credit.
If you don’t want to take this risk, there are home equity and HELOC alternatives that might be better for you.
Compare Home Equity Alternatives
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, but you usually won’t be charged any closing costs or fees like you are with home equity loans and HELOCs.
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 assets if you can’t make 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.
You can compare our picks for the best personal loans here or check out our top-rated partner lender LightStream.
3.49% – 19.99%*
$5,000 – $100,000
Home Sale Leasebacks
Home sale leasebacks are a newer product that may be a good alternative to home equity loans and HELOCs for certain people.
With a home sale leaseback, you sell your house to a company but continue to live there by paying rent. With some companies, you can also repurchase your home at any time.
The benefit of home sale leasebacks is that you don’t have to make payments on a loan and you can typically access larger amounts of money than other alternatives. 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 or check out our partner EasyKnock.
Remain in your home
Receive home appreciation
Time to Funding
Less than 30 days
Home Equity Sharing Agreement
With 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 you get access to cash right away.
Like a home sale leaseback, there are no monthly payments. You typically have around 10 years to either sell your home or buy out the investment.
To learn more, check out our Home Equity Sharing Agreements Guide or check out our top-rated partner Hometap.
Up to $300,000
5% – 30%
Up to 10 years
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 you can 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. This way, you would lower the rate on your mortgage, and the new rate would likely be lower than what you would receive on a home equity loan or HELOC.
Cash-out refinances usually do have higher closing costs as compared to home equity loans and HELOCs, however, so be sure to compare the total longterm costs to decide which is a better option.
>> Read More: Cash-Out Refinance vs. Home Equity Loans
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
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 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.
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. They may 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.
*Your loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Excellent credit is required to qualify for lowest rates. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice.
**Payment example: Monthly payments for a $10,000 loan at 5.95% APR with a term of three years would result in 36 monthly payments of $303.99.
Author: Kimberly Goodwin, PhD