HELOCs and home equity loans are appealing ways to take equity out of your home. A HELOC offers flexible borrowing and repayment, while a home equity loan provides a single sum with fixed repayment terms.
However, not everyone wants to use your home as collateral, risking foreclosure if you can’t repay. Here, we’ll discuss some home equity loan and HELOC alternatives that offer tailored solutions without traditional home equity financing constraints.
Home equity loans allow homeowners to tap into their home’s equity to access funds. While popular, they aren’t the only option. Here are 9 smart alternatives to consider before taking out a home equity loan.
As a homeowner, you’ve likely heard about home equity loans. They allow you to leverage your home’s equity to receive a lump sum of cash to use for any purpose. You make fixed monthly payments over a set repayment term usually 5-30 years.
However home equity loans have some downsides
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Your home is used as collateral, risking foreclosure if you default.
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You’ll have monthly payments on top of your existing mortgage.
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Interest rates may be higher than other financing options.
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You can only access funds once, as a lump sum.
Luckily, home equity loans aren’t the only way to tap home equity. Here are 9 smarter alternatives to consider first:
1. Cash-Out Refinance
With a cash-out refinance, you refinance your existing mortgage for a new loan in a higher amount and receive the difference in cash.
Pros:
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Access a large lump sum of cash
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Potentially get a lower interest rate
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Consolidate existing debts
Cons:
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Closing costs of 3-6%
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Extends your loan repayment term
Best for homeowners looking to lower monthly payments or interest rates.
2. Home Equity Line of Credit (HELOC)
A HELOC provides a revolving credit line secured by your home’s equity, allowing flexibility to withdraw funds as needed.
Pros:
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Withdraw smaller sums as needed
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Interest may be tax deductible
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Typically lower rates than credit cards
Cons:
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Variable rates that can increase
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Upfront fees and closing costs
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Home is used as collateral
Best for flexibility in accessing home equity over time.
3. Reverse Mortgage
Reverse mortgages allow seniors 62+ to receive payments from a lender using home equity as collateral. No repayment is due until the homeowner moves, sells, or passes away.
Pros:
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Receive funds while still living in your home
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No monthly mortgage payments
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Income can be received as a lump sum, line of credit, or monthly payments
Cons:
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Less equity left to heirs
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Upfront costs and fees
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Home must be maintained
Best for seniors who need funds but want to age in place.
4. Personal Loan
Unsecured personal loans provide a lump sum without using your home as collateral. You’ll make fixed monthly payments over a shorter term, usually 2-7 years.
Pros:
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Quick access to funds
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Fixed rates and terms
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No home collateral needed
Cons:
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Higher rates than secured loans
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Strict credit score requirements
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Lower loan amounts
Best for quick financing that doesn’t risk your home.
5. 401(k) Loan
You can borrow against your own 401(k) balance and repay the loan through payroll deductions. Loan limits are usually 50% of your vested balance up to $50,000.
Pros:
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Interest paid goes back into your account
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No credit check or home collateral needed
Cons:
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Reduces retirement savings
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Potential taxes/penalties if you leave your job
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Must be repaid quickly, usually 5 years
Best as a last resort for those with limited financing options.
6. Credit Cards
While not ideal for large sums, credit cards allow you to borrow small amounts as needed.
Pros:
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Quick access to smaller amounts of cash
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Various rewards/cash back options
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No home collateral required
Cons:
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Very high interest rates
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Credit limits may be low for large projects
Best for small, short-term financing needs.
7. Personal Line of Credit
This revolving credit line doesn’t require home collateral, allowing you to withdraw money as needed.
Pros:
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Flexible access to cash over time
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No home collateral required
Cons:
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Variable interest rates
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Lower approval amounts
Best for flexible recurring access to cash without using your home.
8. Rent-Back Agreement
When selling your home, you can retain temporary residency for a period of time after closing. This provides immediate cash while allowing you time to move.
Pros:
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Receive cash from the sale
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Time to transition into new housing
Cons:
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Lose ownership and equity
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Monthly rent payments
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Restrictions on changes
Best when selling your current home but need time find new housing.
9. Home Equity Sharing
You receive cash in exchange for selling a percentage stake in your home’s future appreciation to an investor. No monthly payments are due.
Pros:
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Cash now in exchange for future equity
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No monthly payments
Cons:
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Loss of potential appreciation
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Significant equity may go to investor
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High closing costs
Best for immediate funds if you’re comfortable sharing future equity gains.
Choosing the Best Alternative
When weighing home equity loan alternatives, consider your needs, priorities and financial situation:
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Do you need funds all at once or over time?
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How quickly do you need access to cash?
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Are low rates or payments a priority?
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How long can you repay borrowed funds?
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Are you comfortable using your home as collateral?
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Does your credit score allow you to qualify for unsecured financing?
The Bottom Line
While home equity loans are popular for tapping home equity, they aren’t the only option. Each alternative comes with unique pros, cons and eligibility requirements to consider. As a smart homeowner, be sure to explore all your options to find the best fit before moving forward. This can help you access funds in a way that aligns with your financial situation and goals.
The best home equity loan alternatives
Alternatives like cash-out refinance and bridge loans offer homeowners flexible access to home equity. These options suit those looking to lower payments or bridge property transitions.
Additional options include home equity investments, reverse mortgages, 401(k) loans, and personal loans. Each option provides unique benefits for accessing the cash needed to help you achieve your financial goals.
A cash-out refinance is a mortgage refinancing option in which the new loan amount exceeds the existing mortgage balance, allowing homeowners to access the home equity as cash.
A cash-out refinance involves refinancing your existing mortgage for a new one that’s more than you owe and pocketing the difference.
- It might give you lower interest rates and may lower your payment
- Provides access to cash you can use for significant expenses
- Requires closing costs
- It might extend the life of your loan
A cash-out refinancing is best for homeowners looking to reduce monthly payments or seeking to consolidate high-interest debts.
Compare financing solutions from Rocket Mortgage
- Offers both refinance and home equity solutions
- Competitive interest rates
- Check your eligibility with an online form
A bridge loan is a relatively common type of short-term financing option designed to help homeowners manage the timing discrepancy between selling their current home and purchasing a new one.
A bridge loan provides temporary financing to fund the gap between buying a new home and selling an existing one.
- Facilitates the purchase of a new property without selling your current home
- Offers immediate liquidity
- Higher interest rates
- Typically requires significant equity in your current home (e.g., at least 20%)
A bridge loan is best for individuals purchasing a new home before selling their existing one.
A home equity investment (HEI) is a financial arrangement where investors provide homeowners with cash in exchange for a share of the home’s future value. This is not a loan, so there are no monthly payments.
Investors provide cash upfront in exchange for a percentage of the home’s future appreciation.
- No monthly payments
- Provides immediate cash without incurring debt
- Reduces your home’s future equity and profit upon sale
- This may result in a significant share of appreciation going to the investor
A home equity investment is suited for homeowners who are comfortable sharing future appreciation for current liquidity and don’t want to make monthly payments.
Home equity conversion mortgage (reverse mortgage)
A home equity conversion mortgage (HECM) is a type of loan commonly referred to as a reverse mortgage. It’s a mortgage allowing homeowners 62 years of age or older to access the equity in their homes.
This type of financing provides financial flexibility by converting part of the equity into cash without requiring monthly payments.
Allows seniors to convert part of their home equity into cash without selling their home.
- Provides a lump sum of cash or an income stream without monthly payments
- Enhances financial flexibility in retirement
- Can decrease the home’s value for the future heirs
- Accumulates interest over time, reducing the amount of equity left in the home
Applicants must be 62 or older with substantial equity in their home.
A reverse mortgage suits seniors looking for additional income and wanting to remain in their homes.
A 401(k) loan is a financing option that permits employees to borrow from their 401(k) retirement savings. This type of loan is unique in that it involves borrowing against one’s future, with the individual repaying the borrowed amount plus interest back into their retirement account.
With a 401(k) loan, you can borrow money from your retirement savings and repay the loan with interest in your investment account.
- It doesn’t impact your credit score
- Interest is paid back to your retirement account
- Can jeopardize retirement savings if not repaid
- Not all 401(k) plans offer loans
A 401(k) loan is best for individuals with adequate retirement savings and who are looking for financing that doesn’t affect their credit score.
A personal loan is a flexible financial tool allowing individuals to borrow a set amount of money from a lending institution without needing collateral. It stands out for its simplicity and the speed with which borrowers can access funds.
Personal loans are often used to consolidate higher interest-rate debt, finance large purchases, or cover unexpected expenses.
You’ll receive funding from a personal loan lender – typically a traditional bank, credit union, or online lender – and repay it in fixed monthly payments.
- Quick funding
- It doesn’t require home equity or collateral
- Generally comes with higher interest rates than secured loans
- Approval and favorable rates often require good-to-excellent credit
A personal loan is suitable for individuals who need immediate funds to cover significant expenses, debt consolidation, or emergencies without using their home as collateral.
Credit cards and personal lines of credit are two top HELOC alternatives for individuals seeking flexibility without tying up home equity.
A credit card is a type of financing that banks and other financial institutions issue. This type of financing provides users with a pre-approved credit limit that can be used on demand for purchases, cash advances, and balance transfers.
Not only do credit cards allow immediate access to funds up to a specific limit and the option to carry a balance with interest, but they are distinguished from other financing by their flexibility.
Credit cards provide the cardholder with a revolving line of credit with a fixed credit limit, which the borrower can use and repay as needed.
- Convenient for short-term borrowing
- Potential for rewards such as cashback and travel points
- High-interest rates if balances are carried month-to-month
- It can lead to high debt accumulation if not managed properly
Credit cards are suited for individuals with short-term financial needs who can pay off the balance quickly to avoid accruing high interest and those looking to earn rewards for their spending.
HELOC Vs Home Equity Loan: Which is Better?
FAQ
How can I get equity out of my house without a loan?
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Is it better to borrow from the bank or a home equity?
Is HELOC cheaper than home equity loan?