7 home equity loan alternatives to consider

If you need money for big expenses, using your home’s value isn’t the only choice. While home equity loans are a common way to get cash, there are other options that might work better for you. In this article, you’ll find seven different ways to borrow money besides a home equity loan. These options can help you cover costs like home repairs, paying off debt, or dealing with unexpected bills. Each choice has its own benefits, giving you more ways to get the money you need without depending only on your home’s value.

See also: Pros and cons of home equity loans: A homeowner’s guide

Cash-out refinance

A cash-out refinance is when you replace your current mortgage with a new, larger loan and take the extra money in cash. The new loan pays off the existing mortgage, and you get the remaining funds for other needs, such as home upgrades, consolidating debts, or covering various expenses.

How does it work?

The process begins with the lender assessing your home’s current market value to see how much equity you have. If the value has gone up, you might qualify for a higher loan amount. The lender will then review your financial details, like your credit score and income, to decide whether to approve the new mortgage. Once approved, the new loan will pay off your previous mortgage, and you will receive the extra amount in cash. Afterward, you’ll start repaying the new loan, which typically comes with a fixed or adjustable interest rate.

Benefits

One advantage is that you may secure a lower interest rate if rates have decreased since your original mortgage. This option also provides access to a lump sum of money that you can use for important purposes, like home improvements or paying off high-interest debts. Additionally, there’s a chance to negotiate better loan terms, such as having a fixed rate or extending the repayment period.

Things to keep in mind

However, refinancing comes with closing costs, which can be significant. It’s essential to calculate whether the savings from a lower interest rate will cover these expenses. There are also equity limits, as lenders typically allow borrowing up to 80% of your home’s value, meaning you must keep at least 20% equity. Lastly, it’s important to use the cash responsibly to avoid adding more debt unnecessarily.

Home equity line of credit (HELOC)

A Home Equity Line of Credit, or HELOC, is a loan that lets homeowners borrow money based on the value of their home. It works similarly to a credit card, where you get a set credit limit and can borrow up to that amount, pay it back, and then borrow again while the loan is still open.

How does It work?

The process starts with the lender figuring out how much equity you have in your home by looking at its current market value and how much you still owe on your mortgage. If you qualify, the lender will set a credit limit based on the equity you have and your financial situation. During the initial phase, known as the draw period, you can take out money as needed up to the credit limit, and you’ll only pay interest on what you actually borrow. When the draw period ends, you’ll need to start repaying both the borrowed amount and the interest in a new phase called the repayment period.

Benefits

A major benefit of a HELOC is its flexibility. You can take out only the amount you need, up to your approved limit, and you’re only charged interest on the amount you use. HELOCs often come with lower interest rates compared to other types of loans, such as personal loans and credit cards. In India, there could also be a tax advantage if the money is used for home improvements, as the interest paid may be tax-deductible.

Things to keep in mind

One thing to watch out for is that HELOCs usually have variable interest rates, which means your monthly payments can go up if interest rates rise. There’s also a risk because your home is used as collateral; if you don’t make your payments, you could lose your house. Additionally, there may be extra fees involved, like charges for setting up the loan, annual fees, or fees for each transaction.

Reverse mortgage

A reverse mortgage is a type of loan meant for seniors aged 60 and older that lets them turn part of their home’s value into cash without selling the house. The loan gets paid back when the homeowner decides to sell the house, movies out for good, or passes away.

How does it work?

To qualify for a reverse mortgage, the homeowner must be at least 60 years old, and the home should be their primary residence. The amount you can borrow depends on how much the home is worth, the borrower’s age, and the current interest rates. The homeowner has the option to get the money as a one-time lump sum, in regular monthly payments, or a mix of both. The loan, along with any interest that has built up, is repaid when the homeowner either sells the home, leaves it permanently, or passes away.

Benefits

One of the main advantages is the extra income it provides, which can help cover everyday expenses, medical bills, or other needs. There are no monthly payments to worry about, unlike with a regular mortgage. Plus, the homeowner can continue living in their house while using the money from the loan.

Things to keep in mind

However, reverse mortgages often come with higher interest rates compared to traditional loans. As time goes on, the equity in the home decreases since the loan balance goes up. It’s also important to note that when the homeowner passes away or sells the house, the loan must be paid off, which could reduce the amount left for the heirs.

Personal loan

A personal loan is a type of loan that doesn’t require you to put up any collateral, like property or other assets, to secure it. You can use the money for a wide range of needs, such as covering medical bills, home repairs, education costs, or even going on a trip. Because it’s an unsecured loan, it’s easier for more people to qualify.

Personal loans in India can range anywhere from ₹50,000 to ₹40,00,000, depending on what the lender offers and how qualified you are. The interest rate usually starts at about 10.85% per year and can go up to 14.85%, depending on things like your credit score and income. The loan can be repaid over a period of 1 to 7 years, giving you some flexibility in choosing how long you need to pay it back. Lenders might also charge a fee for processing the loan, which usually falls between 0.50% to 1% of the loan amount, with some minimum and maximum limits. To qualify, you’ll generally need to show proof of a steady income, have a good credit score, and meet some minimum income requirements.

Benefits

Personal loans are quite flexible because you can use the money for almost anything. Since no collateral is needed, you don’t have to risk losing your assets. Another plus is that many lenders can approve and give you the loan quickly, sometimes within just a few hours or days.

Things to keep in mind

On the flip side, personal loans usually come with higher interest rates compared to loans that are backed by collateral. It’s important to manage your debt well and make repayments on time to avoid extra interest costs and a hit to your credit score. Missing payments can negatively affect your credit score, so it’s crucial to stay on top of them.

Personal line of credit

A Personal Line of Credit (PLOC) is a flexible way to borrow money whenever you need it, up to a certain limit set by your lender. It’s different from a regular loan because, instead of getting all the money at once, you can borrow what you need when you need it, pay it back, and then borrow again up to your limit.

How it works

To get a PLOC, you first need to apply through a bank or financial institution. The lender will check your financial history to decide if you qualify and set your credit limit. Once approved, you can take out money up to your limit through online banking, ATMs, or even by writing checks. The good thing is that you only pay interest on the amount you actually use, not the whole credit limit. You can pay back the borrowed money whenever you want, and once you do, that amount is available for you to use again.

Benefits

A Personal Line of Credit gives you the freedom to borrow only what you need, when you need it, up to your set limit. The interest rates are usually lower than those for personal loans. There’s also no fee for paying off what you owe early, and you can access the money easily through online banking, ATMs, or checks.

Things to keep in mind

One thing to note is that the interest rates can change over time, which might affect how much you pay. It’s also important to borrow responsibly and not take out more than you can handle. Lastly, there could be extra fees, like annual fees or other charges, so make sure you know what’s involved.

Rent-back agreement

A rent-back agreement is when a homeowner sells their house but keeps living there for a set time by paying rent to the new owner. It’s a helpful deal for both sides—the person selling gets more time to find a new place, and the buyer can start earning money from renting right away.

How does It work?

The agreement spells out how long the former owner can stay in the house after selling it, usually anywhere from a few months to a year. Both parties agree on the rent, which is often close to the regular market rate or a bit lower. Sometimes, a security deposit is needed to cover any damage or unpaid rent during the stay. The agreement should also make it clear who will handle maintenance and repairs while the former owner is still living there.

Benefits

This arrangement gives the seller more time to find a new home without having to rush. For the buyer, it means they can start getting rental income immediately after buying the house. Plus, since someone is still living in the home, there’s no risk of the place being empty and not making money.

Things to keep in mind

It’s important to have a legal contract in place that covers all the details to protect both parties. Make sure the terms, like how much rent is and who’s responsible for repairs, are clearly explained. There should also be an exit plan in case the seller needs to move out earlier or later than expected.

Home equity sharing agreement

A Home Equity Sharing Agreement, or HESA, is a deal where a homeowner sells part of their home’s value to an investor. In return, the homeowner gets a lump sum of cash. The investor then shares in any future increase or decrease in the home’s value.

How does it work?

First, the homeowner applies for a HESA with a financial institution or an investor. The investor will then evaluate how much the property is worth and how much equity the homeowner has. After that, the homeowner and investor agree on the details, like how much equity is being sold and the terms of repayment. Once they agree, the investor provides a cash lump sum based on those terms. In the future, if the value of the home goes up or down, the investor shares in that change.

Benefits

This agreement gives homeowners quick access to cash without needing to sell their home or take on more debt. Unlike loans, there are no monthly payments to worry about. Additionally, the investor shares the risk of any changes in the property’s value, which can help lessen the financial strain on the homeowner.

Things to keep in mind

While a HESA can provide immediate cash, the homeowner does give up some of their equity and potential future value. It’s important to have a legally binding contract that clearly explains all terms and conditions. The investor may also have certain rights regarding the property, such as the ability to sell their share in the future.

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