5 Home Equity Alternatives

If you're gearing up for a major home renovation or exploring options to consolidate debt, you may be wondering whether tapping into the money you have in your home is worth it. Many homeowners use their property's equity to achieve their financial goals.

Some homeowners learn a traditional home equity loan won’t fit their needs. Fortunately, there are other ways to benefit from the equity in your home. Let’s run through five home equity loan alternatives that allow you to leverage equity differently or don't require any equity at all.

Should You Consider A Home Equity Loan Alternative?

A home equity loan works when you need a lot of money for a significant one-time expense – but it’s not for everyone. It is a type of second mortgage, so you would have two mortgage payments to cover.

First, there are closing costs to take into account. Homeowners may not have enough money to cover the closing costs on a home equity loan. Homeowners must also consider their lender’s underwriting requirements when they apply for a home equity loan, including how much equity is in the home, their credit score and their finances.

If the application doesn’t meet the lender’s criteria because there isn’t enough equity in the home or the loan puts the homeowner at risk of default, a home equity loan may not be the right choice. Given these factors and the long-term commitment of making monthly payments alongside your mortgage, a home equity loan may not work for every homeowner.

Fortunately, there’s more than one way to access home equity. Let’s explore some alternatives to a home equity loan below.

Home Equity Loan Alternatives

When a home equity loan doesn’t work, but you need funds, explore home equity loan alternatives that may fit your circumstances better.

Cash-Out Refinance

A cash-out refinance is a popular home equity loan alternative that typically allows you to borrow up to 80% of your home's value, depending on your lender. With a cash-out refinance, homeowners swap their existing mortgage with a new loan. They take out a larger loan that pays off their existing mortgage and the difference comes as a lump-sum payment they can pocket and use.

A cash-out refinance can be especially helpful if interest rates have dropped since you took out your original mortgage. A lower interest rate can result in lower monthly mortgage payments.

But, as tempting as a cash-out refinance may sound, they have some drawbacks.

A cash-out refinance may extend your repayment period, effectively resetting the clock on your mortgage payments. It may increase your total interest payments if the interest rate you get is higher than the rate on your original mortgage. You’ll need to meet a lender's eligibility criteria, including proof of a steady income, at least 20% equity in the home and usually a minimum credit score of 620. And you’ll need to factor in closing costs, appraisal fees and other lender requirements.

When To Consider A Cash-Out Refinance:

• You need a significant amount of money. A cash-out refinance can provide a substantial lump sum, making it a good option for big-ticket expenses like home improvements or college costs.
• Interest rates are lower than your existing mortgage rate. A cash-out refinance could reduce your monthly mortgage payments in this scenario and save you money over the long term.

Always calculate your potential savings and consider the loan’s overall impact on your finances before proceeding.

Personal Loan

If you’re dealing with a smaller one-time expense or want to streamline a smaller amount of debt, a personal loan can be an effective alternative to a home equity loan. Like a cash-out refinance, personal loans are versatile – you can use the funds for any purpose. Lenders typically require a credit score in the mid-600s and a stable income.

Personal loans are often used for debt consolidation, with the funds going towards paying down outstanding debts, effectively consolidating multiple debt payments into one personal loan payment. Because a personal loan is usually smaller than a cash-out refinance, it’s a valuable option if you need to borrow a smaller amount. You must balance what you need with what a lender may approve.

When To Consider A Personal Loan:

• You have multiple high-interest debts. Applying for a personal loan to consolidate your debt can streamline your monthly bills into one payment and may save you money on interest.
• You want a debt solution that’s not tied to your home. You can apply for a personal loan regardless of the equity you have in your home because your home – or any other personal asset – isn’t tied to the personal loan.

Home Equity Line Of Credit

A home equity line of credit (HELOC)* is another home equity loan alternative that offers flexible access to your home's equity. While a home equity loan provides an upfront lump-sum payment, a HELOC offers a line of credit, like a credit card, that you can draw from on demand until your repayment period begins.

A line of credit can be helpful for ongoing costs or a project with a rolling budget. HELOCs typically have variable interest rates and may look attractive to homeowners because they can start with lower interest rates than other loan options. But because the rate is variable, there’s always the risk that the rate can go up.

If your rate starts to climb, your payments will get more expensive. Like a home equity loan, a HELOC is a secured loan. Because your home is collateral for the line of credit, you may lose it if you can’t keep up with payments.

To qualify for a HELOC, most lenders require a steady income, a credit score in the mid-600s or higher and 15% – 20% equity in the home.

When To Consider A HELOC:

• You need routine access to a line of credit: A HELOC is an excellent option if you anticipate needing funds over a period of time rather than upfront for a one-time expense. HELOCs are ideal for ongoing projects or rolling costs, like home renovations or multiple college tuition payments.
• You can manage interest rate increases: If you're financially secure and can handle potential increases in your repayment amounts, a HELOC may initially offer a lower interest rate than fixed interest rate options.

* Please note that our friends at Rocket Mortgage® don’t offer HELOCs at this time.

Reverse Mortgage

A reverse mortgage* is an alternative for homeowners ages 62 and older. Instead of making monthly mortgage payments to a lender, with reverse mortgages, homeowners receive a steady income from a lender based on a portion of home equity. This helps retirees or homeowners on fixed incomes can tap into the equity they’ve built in their homes without selling it.

However, reverse mortgages have potential drawbacks. The loan must be repaid when the homeowner moves out, sells the home or dies. An heir or beneficiary must repay the outstanding loan balance. Otherwise, they’ll have to walk away from the property. Reverse mortgages also have high upfront costs and fees. When you add in interest, it only increases the amount you owe the lender.

To qualify for a reverse mortgage, the borrower must be at least 62, use the home as their primary residence and have paid off most or all of their original mortgage.

When To Consider A Reverse Mortgage:

• You’re at least 62 years old. Reverse mortgages are loans for homeowners age 62 and older who have a lot of home equity and want to supplement their income.
• You plan to stay in your home. Because lenders don’t require loan repayment until the homeowner moves out, sells the home or dies, reverse mortgages are best suited for homeowners who plan to stay in their homes.

* Please note that our friends at Rocket Mortgage don’t offer reverse mortgages at this time.

Home Equity-Sharing Agreement

A home equity-sharing agreement* is a unique alternative to a home equity loan. A homeowner sells a percentage of their home's future value to an investor in exchange for a lump-sum payment, allowing the homeowner to access cash without taking on additional debt.

While the investor doesn’t own the home outright – only a percentage of its equity – the homeowner gives up a portion of their home’s future appreciation, which may be worth more than the cash they received.

Eligible homes typically have substantial home equity and are in markets where home values are soaring.

When To Consider A Home Equity-Sharing Agreement:

• You anticipate significant appreciation in your home. If you expect your property's value to increase significantly, a home equity-sharing agreement may be worth considering.
• You don’t plan to sell in the near future. This arrangement works best when a homeowner plans to live in their home for many years because the investor shares the risk of the home's value declining. If the home’s value doesn’t rise as expected or even drops, a homeowner won’t owe as much to the investor as the initial cash payment.

* Please note that our friends at Rocket Mortgage don’t offer home equity-sharing agreements at this time.

The Bottom Line

Home equity loans and home equity loan alternatives offer homeowners financial flexibility and access to cash. Before you decide how to tap into your home equity, take your finances, long-term plans and the current and anticipated future market value of your home into account.

Your home is more than just an ATM. It's an integral part of your life that can help you access money that supports your lifestyle and financial goals. Rocket Mortgage makes exploring home equity loan alternatives fast and easy. Start an application today and get the cash you need to unlock the value in your home.