Home Equity

7 HELOC and Home Equity Loan Alternatives to Consider

October 22, 2023

Many homeowners are surprised to find out that owning your own home provides a built-in path to a lower interest rate on loans—specifically through home equity loans and home equity lines of credit (HELOC). And with the soaring rise in interest rates, these options are nothing to overlook.

That said, it’s important to note that home equity loans and lines of credit also come with upfront closing costs and risks if you can’t repay the loan amount. So, is a HELOC a good idea for you? Is it a home equity loan? If you’re unsure, consider these home equity loan and HELOC alternatives before committing to a loan option.

Below are seven home equity loan and HELOC alternatives to either point you in a new direction or confirm that an equity-based debt is your best bet.

Alternatives to HELOC and Home Equity Loans

Depending on how quickly and how much cash you need, be creative when brainstorming solutions. For a strong basis of your possibilities, here are 7 HELOC and home equity loan alternatives:

1. 0% Introductory Interest Rate Credit Card

If an intro offer seems too good to be true, read the fine print. Credit card companies take in a whopping $120 billion annually from the interest and annual fees paid by consumers—plus what they make off of business transactions every time a card is used.¹

That being said, a credit card with an introductory offer of zero interest for one to two years can be a great alternative to borrowing against your home equity. Be sure to:

Carefully compare and contrast offer details
Note all fee and penalty risks and set reminders to avoid them
Restrict use to needs vs. wants
Make every monthly payment on time
Pay off the balance before the zero interest period runs out

To find and evaluate cards, search for “best credit card intro offers” online. Then compare total benefits (i.e., annual fees, transfer fees, etc.) on sites such as Bankrate, Nerdwallet, or Motley Fool.

Pros include:

No interest cost if you repay before the introductory period ends
No risk of property foreclosure
Easier application and borrower requirements than the home equity loan or HELOC process

Cons include:

Monthly repayment of borrowed principal begins immediately
Easy to overuse if you find budgeting a challenge
When introductory period ends, interest rate jumps much higher than a home equity loan or home equity line of credit

2. Reverse Mortgage Line of Credit

Reverse mortgages are a bit odd in the realm of equity debt. While they are loans, you can arrange them not only to delay repayment until you stop living in the house, but also to provide a monthly check to you instead of the reverse.

Within the reverse mortgage family, however, you can also choose a line of credit—in fact, it’s the most popular option. Most reverse mortgagees use the FHA-insured HECM (home equity conversion mortgage), and in 2021, 90% of these borrowers opted for a line of credit instead of a monthly payout or lump sum.²

Pros include:

Lower interest rate than home equity loans and HELOCs
Available, unused credit amount grows in size over time³
No repayments due until borrower dies or moves out of the home
After 12 months, can redraw and repay funds continually with a revolving line of credit
Can roll closing costs, fees, and interest into the credit line, payable at property transfer⁴

Cons include:

Must be 62 or older to qualify
Borrower must secure and pay for ongoing mortgage insurance
Higher closing costs and fees compared to home equity loan and HELOC closing costs

Need to wade through fraudulent and misleading offers and digest complex contracts
Cannot will the property to heirs unless they pay off the loan amount, interest, and all fees

3. Cash-Out Refinance

A cash-out refinance is a from-scratch replacement of your current mortgage that also gives your budget a cash injection. You’ll borrow:

The funds to pay off your current mortgage and any loans against your equity
An amount of cash back, typically up to 80% of your equity⁵

Pros include:

Single payment instead of adding a new loan payment on top of your mortgage
Low interest rates comparable to home equity loan and HELOC rates⁶
Fixed rate loan with predictable payment

Cons include:

Monthly repayment of principal plus interest begins immediately
Increase in total interest paid if your current mortgage is lower than today’s rates
Loss of home equity—cash out means going backward in mortgage payoff momentum

Pro tip: If you are considering this alternative, learn more about the differences between a HELOC vs cash-out refinance to determine which option is right for you.

4. Sale-Leaseback (Rent-Back Agreement)

If you want to stay in your cozy nest but wish you could cash in on selling it, a sale-leaseback might be for you. You sell your home to an investor-landlord who rents it back to you for as long as you want to stay.

Pros include:

Convert your home equity to cash
Pay off your current mortgages and liens
Ability to remain in your home as renter
No more homeowner’s insurance or property tax payments
Landlord handles cost and effort of covered maintenance and repairs
May improve credit score by paying off current debts vs. adding a new one
No formal loan underwriting

Cons include:

Loss of title to home
Will need to budget for monthly rent
Limits on future remodeling or construction to comply with lease agreement
No longer able to will the property to heirs

Your home is one of your biggest investments, and it might just be big enough to attract other investors. Home equity-sharing agreements are now offered by a limited pool of investment companies.

Instead of loaning you money, investors buy a minority stake in your property (with no right of occupancy—they won’t be stopping by to hang out). Over time, as your home appreciates in value, their percentage stake in it grows in dollar value as well.

At the end of the investment term (10 to 30 years, or upon transfer if you sell it sooner) you’ll pay them a lump sum of their initial investment plus the value of their share of your home’s appreciation.⁷

Pros include:

Often have no monthly payments
No interest to repay
No possibility of an underwater loan—if property loses value, investors take a loss
Not a form of debt
Lower credit score and income requirements than a home equity loan or HELOC

Cons include:

Usually on able to access 17.5% and 30% of your equity
A lump sum will be due at the end of the term (or when you sell your house)
Limited availability—four known companies each cover only select states
Newer investment model unfamiliar to many homeowners and financial planners
Penalties payable if you buy back your equity before the term ends

6. Personal Loan

Rather than securing debt through equity, you can apply for a personal loan based on your credit history and financial picture.

Pros include:

No collateral required
Simpler, faster closing process and lower closing costs than a home equity loan
No risk of foreclosure if you miss payments or default on the loan

Cons include:

Higher interest rate for an unsecured personal loan than a home equity loan
Tougher eligibility requirements
Monthly payment of principal plus interest begins immediately
Potentially high fees and penalties

7. Personal Line of Credit

As with a personal loan, a personal line of credit is usually unsecured and thus at a higher interest rate than equity-backed debt. The lender is vetting your ability to repay based entirely on your credit history, financial profile, and continuing income, with no backup plan if you don’t repay them.

Pros include:

No risk of foreclosure if you miss payments or default on the loan
No collateral required
Simpler, faster closing process and lower closing costs than a HELOC loan

Cons include:

Higher variable interest rate for an unsecured personal LOC than a HELOC
Tougher eligibility requirements
Monthly repayment of principal plus interest begins immediately
Potentially high fees and penalties

Key Takeaways

Before committing to a method to raise the cash you need, compare options beyond a home equity loan or HELOC loan. Take a hard look at both the monthly repayment price tags and the total cost of interest, fees, and other charges.

Borrowers of all ages can compare home equity loans and HELOCs to a cash-out refinance, and adults over age 62 may benefit from the credit pool growth of a federally backed reverse mortgage line of credit. Loans that avoid risking your equity and property include zero-interest credit cards and personal loans and lines of credit.

A sale-leaseback is a debt-free alternative that opens up your home’s equity while you continue to live in it. Finally, an equity-sharing agreement isn’t quite a loan but does require a payout that costs you a portion of your home’s appreciation.

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