Home equity loans are valuable tools that can help homeowners in a financial pinch. When you need a loan but don’t have excellent credit or other assets, a home equity loan could be the best way to borrow money quickly.
However, home equity loans aren’t perfect and sometimes come with a few risks (such as a high-interest rate). Let’s look into some of the alternatives to home equity loans.
A home equity line of credit (HELOC) is a line of credit secured by your home equity, similar to a credit card or store line of credit. The home equity that you have built in the property acts as collateral. If you default on the HELOC, the lender has the right to take possession of the home to recoup their losses.
Using your equity as collateral is risky, but it has several benefits. For example, interest rates for HELOC are typically much lower than other loans. However, it is important to remember that most HELOCs are adjustable interest rates. So even though they start low, they will move with the market. Additionally, it’s typical to only pay interest and not principal during the draw period. In other words, you don’t have to pay the amount you borrow while using it.
It’s important to note that many HELOCs only allow you to draw from the total line of credit for 10 to 15 years. After that window closes, you’ll enter the “repayment period” when you must pay whatever you borrowed.
A cash-out refinance means taking out a new mortgage loan and exchanging some of your equity for cash. The new loan would likely have a much higher total amount as it covers the value of the original mortgage plus the extra equity you cash out.
Opting for a cash-out refinance can be an excellent way to get a lump sum of cash quickly. If you suddenly experience significant unexpected expenses, cashing out could be a lifesaver. The move can be risky, though, as you’ll likely have to pay more over a longer loan term.
Of course, you can always avoid a home equity loan by taking a traditional personal loan instead. The terms of most personal loans are based on your credit score, debt-to-income ratio (DTI), total earnings, and a few other financial factors.
A personal loan may be what you need if you have good financial health and excellent creditworthiness. A personal loan lets you keep your debts separate from your house — you won’t have to offer your home or equity as collateral, meaning you won’t lose homeownership if you default.
Receiving a personal loan with reasonable terms and interest rates without excellent credit can be challenging. Even if you do receive an adequate personal loan, you’ll need to repay that loan promptly to avoid a significant hit to your credit score.
Using a credit card would mean receiving an open line of credit not secured by your home equity — but you’ll need a good credit score and good credit history to be offered something worthwhile. Plus, applying for a credit card can lead to lower credit scores, as the process includes a hard inquiry of applicants’ credit reports.
On the plus side, many credit cards have little to no fees and excellent interest rates in the beginning as long as you have a good enough credit score and keep up with the monthly payments. Defaulting on credit card payments doesn’t mean losing your home equity or other assets you offered as collateral.
Just keep in mind that not all credit cards are the same. Always read the fine print of a credit card agreement before agreeing to it. For example, most credit cards have significantly higher interest rates once the introductory period expires, which may not be boldly advertised.
A home sale-leaseback involves selling your home to a willing buyer, then having that buyer immediately lease the house back to you.
In this way, you’ll surrender the burdens of homeownership and will no longer have monthly mortgage payments. Instead, you would be making regular lease payments to the new owner.
It’s not easy to find someone willing to join you on a home sale-leaseback, but it’s an excellent way to avoid foreclosure and continue living on the same property. Also, a home sale-leaseback could help you take advantage of your home equity by liquifying it during the initial sale.
For instance, if the buyer offers to purchase your equity in the property, you could escape your current homeownership situation with a lump sum of cash in your bank account.
If other options aren’t fitting your specific needs, consider home equity sharing with Balance. Balance allows homeowners to pay off their existing mortgage and access funds by selling a portion of their home equity rather than taking on any additional debt.
You'll make a monthly payment to Balance that covers your occupancy of the home and your share of the insurance and taxes, and Balance shares in the costs, appreciation, and depreciation of your home.
Partnering with Balance can make it easy to get your finances back on track and enjoy greater stability.
If you’re having financial troubles and looking to use your home equity to get out of them, Balance might be the best option.
With Balance, you can enjoy the flexibility you need without compromising your homeownership. When things get back to normal, you can buy us out of our share and regain sole ownership of your home equity. Contact us today to learn more.
Sources:
HELOC (Home Equity Line of Credit) and Home Equity Loan: Comparing Your Options | Investopedia
Collateral Definition, Types, & Examples | Investopedia
Cash Out Refinance vs Home Equity Line of Credit | Bank of America
Get to Know the 'Leaseback,' the Pandemic House Selling Trend Where no Move Is Required | Money.com
