A home equity line of credit (HELOC) is one of the most popular home equity financing solutions. However, it’s not the right financial tool for everyone. If you are looking for a source of funds – but do not want a revolving line of credit, do not wish to use your home as collateral, or simply have trouble qualifying – a HELOC alternative may be a better choice.
In this article, we’ll cover the top HELOC alternatives – so you can select the best solution for your needs.
6 HELOC alternatives
Good news – there are many options available for borrowers seeking an alternative to HELOCs. While some of these are also secured by your home, others are unsecured or backed by a different type of asset. Some come with fixed monthly payments – and some don’t even have monthly payments. Let’s dig in!
Home equity loan
When discussing alternatives to a home equity line of credit (HELOC), it make sense to start with the most similar product: the home equity loan.
How it works
A home equity loan acts like a second mortgage. You get a lump sum in exchange for a predictable monthly payment. Unlike HELOCs, which almost invariably come with a adjustable rate, a home equity loan has a fixed interest rate.
Terms and features
- Payment type: Lump sum
- Repayment: Fixed-rate monthly payment
- Loan amount: Up to 80-85% of your home equity. Many lenders will give you up to $500,000, although some will go as high as $1M.
- Term length: 15 or 30 years is most common
Requirements
- Credit score: 680, although it may be possible to find a home equity loan with a score above 630.
- Income/DTI: A steady monthly income with a DTI of under 43%.
- Necessary assets: A home with at least 15-20% equity.
Special considerations
The chief appeal of the home equity loan is the predictable nature of the payments. Unlike a HELOC, where your payments will change between the draw and repayment period, as well as month-to-month, you’ll know exactly how much you’re spending for the entire life of the loan.
However, you’ll likely pay a premium for this privilege – home equity loans generally come with higher interest rates than HELOCs. Additionally, like any other home equity product, the loan is secured by your home. That means you could lose your home if you fail to make your payments.
Home equity investment
A home equity investment is a HELOC alternative with no monthly payments and broader qualification requirements.
How it works
Home equity investments are equity financing for homeowners. You cash out your home equity today in exchange for a share of your home’s value in the future.
Terms and features
- Payment type: Lump sum
- Repayment: One lump sum payment any time within the term.
- Loan amount: $30,000 to $500,000
- Term length: 30 years
Requirements
- Credit score: 500
- Income/DTI: No DTI or income requirements .
- Necessary assets: A home in an eligible location – with plenty of equity
Special considerations
A home equity investment is a compelling option for homeowners looking to pay off debt or finance a major purchase without compromising monthly cash-flow. However, because the repayment amount is based on your home’s end value, your final cost is not clear until you are ready to pay back the investment.
Personal line of credit
If you like the flexibility of a HELOC – but would prefer a solution that is not tied to your home – a personal line of credit could be a good fit for you.
How it works
Like any other revolving line of credit, you get access to a set amount of funds over a pre-determined period of time. More cash becomes available to you as you pay down your balance.
Terms and features
- Payment type: Revolving line of credit
- Repayment: Variable-rate monthly payment. You can make minimum required payments or pay extra.
- Loan amount: 500 to $50,000
- Term length: Some personal lines of credit come with an open-ended term, like a credit card. Others have a draw period of 2 to 5 years, followed by a 10-year repayment period.
Requirements
- Credit score: 670 or higher
- Income/DTI: Good income, and a DTI of 40% or under.
- Necessary assets: N/A
Special considerations
Because a personal line of credit is unsecured, your home is not at risk if you fail to make payments – just your credit score. Personal lines of credit generally come with some annual fees, and some providers will require you to pay off your balance annually. Make sure you fully understand the features of your personal line of credit before moving forward.
Cash-out refinance
If you want to take out some of your home equity – but don’t want to manage multiple payments and products – a cash-out refinance could be the right choice for you.
How it works
You take out a new, larger loan to pay off your existing mortgage and pocket the difference. Just like your current mortgage, a cash-out refinance comes with a huge variety of possible terms and conditions.
Terms and features
- Payment type: Lump sum
- Repayment: Fixed or variable-rate monthly payments
- Loan amount: Up to 90% of your home value, although 80% is more common.
- Term length: 30 years is most common, but 10, 15, or 20-year terms are also available.
Requirements
- Credit score: 620 or higher
- Income/DTI: Stable income, and a DTI of 50% or under
- Necessary assets: A home with at least 10-20% equity
Special considerations
Because a cash-out refinance replaces your existing mortgage with a new one, you need to consider the impact of a new rate on your cost and monthly payments. If your new rate would be significantly higher than your existing rate, this may not be a great financial decision.
Reverse mortgage
The reverse mortgage was designed to help homeowners age in place and cover the costs of retirement.
How it works
This financing tool for seniors aged 62 or older offers cash from your home without monthly payments. Instead, the interest builds up over time.
Terms and features
- Payment type: Lump sum, line of credit, or monthly installment
- Repayment: In a lump sum after the homeowner no longer lives in the property, typically via home sale.
- Loan amount: A percentage of your home value, determined by your age. The older you are, the more of your home value you can tap into.
- Term length: Until the homeowners on title no longer live in the home.
Requirements
- Credit score: N/A – there is no credit score requirement.
- Income/DTI: Enough income to cover maintenance costs and property taxes for your home.
- Necessary assets: A home with at least 50% of your equity.
Special considerations
A reverse mortgage needs to be in first lien position, which means that you need to pay off your remaining mortgage balance using the proceeds. Additionally, take special note if anyone who lives in your home is not on title. Once the the final resident who is on title leaves the home, the reverse mortgage balance will come due.
401(k) loan
A 401(k) lets you leverage a different asset to take care of your financial needs – your retirement account.
How it works
You work with your account’s administrator to borrow from your 401(k). The funds must be repaid in no more than five years.
Terms and features
- Payment type: Lump sum
- Repayment: Fixed-rate monthly payments.
- Loan amount: 50% of your 401(k) balance or $50,000 – whichever is less.
- Term length: Up to 5 years.
Requirements
- Credit score: N/A – there is no credit score requirement.
- Income/DTI: No traditional income requirements, although you do need to be able to make your payments – otherwise, you risk tax penalties.
- Necessary assets: An eligible retirement account.
Special considerations
Because you are borrowing from your retirement account – and thus your future financial security – take extra care to repay your balance in a timely fashion. If you don’t, the risk is more than just a retirement shortfall – the IRS could come knocking.
Final thoughts
We’ve covered some of the top alternatives to HELOCs – but only you know which option is the best choice for you. If you are a homeowner looking to tap into your home equity with no income requirements, no monthly payments, and no need for perfect credit, consider an HEI from Point. It takes under 60 seconds to prequalify.
No income? No problem. Get a home equity solution that works for more people.
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