A home equity line of credit, or HELOC, is an effective financial tool that homeowners can utilize to access their home equity. However, like most things in life, there are pros and cons to the product. One of the drawbacks of a HELOC is the complicated qualifying process. It is important to know what other options are available to access your hard-earned equity.
Today, we'll review five home equity alternatives to help you determine which option may be best for you.
The first option is to use your home’s equity like a traditional loan instead of a line of credit. With a home equity loan, you can borrow a lump sum with a fixed interest rate using your home’s equity as collateral.
Home equity loans are often very accessible for many homeowners, even those without an excellent credit score or other valuable assets to offer as collateral.
The total loan amount you can borrow is based on your credit score, equity value, and debt-to-income ratio (DTI).
If you are unable to qualify for a more traditional personal loan, a home equity loan could be an excellent alternative.
What if you’re struggling to make your current mortgage payments on time and want to avoid the financial disasters of foreclosure? In that case, a home sale-leaseback could be the best solution.
With a home sale-leaseback, you sell your home to a willing buyer, and they immediately lease it back to you. You become a lessee for the property, meaning you get to stay in your home as long as you make regular lease payments to the new homeowner instead of mortgage payments to your lender.
With a home sale-leaseback, you can get out of foreclosure and many of the responsibilities of homeownership, including maintenance, taxes, insurance, property fees, etc.
In some cases, you may even be able to cash out the equity that you’ve built up and receive a lump sum payment — but this will largely depend on the details of the deal that you work out with the lessor.
There’s no guarantee that you’ll be able to purchase your home back from the new lessor after you’ve both accepted the deal, and agreeing to a home sale-leaseback will mean you’ll give up your status as the homeowner.
A reverse mortgage line of credit, sometimes called a home equity conversion mortgage or HECM, is a unique option for those 62 or older. If you have enough equity in your home, you can take out a reverse mortgage and use that equity as collateral for a line of credit.
With this method, the unused amount of your line of credit can grow over time. Also, you’ll never lose access to this line of credit, no matter how the economy performs. That type of security can make this option a stellar way to secure extra cash if you can't work or your retirement income isn't substantial enough.
One of the best features is that you don’t need to make regular monthly payments, since you only owe money when you use the line of credit. However, you can change this and alter your reverse mortgage payment plan if you prefer monthly payments out of your equity limit.
It’s important to note that with a reverse mortgage line of credit, you don’t have the same limits as with a home equity line of credit.
You can continue to draw from the line of credit as much as you like, provided you still have space. In contrast, a home equity line of credit prevents you from drawing more money from the balance after a certain point. The loan balance gets larger over time, and the value of the estate or inheritance may decrease over time.
A cash-out refinance is when a borrower selects a lender to pay off their current loan, assume the previous balance, and then increase it according to the cash out desired. The difference between the new and your previous loan amount is determined by the equity you wish to cash out in a single lump sum.
A cash-out refinance could be a good HELOC alternative if you want quick access to cash and don’t have any other assets. If you have medical bills, student loans, or other debts piling up, a cash-out refinance could get the money you need to pay them.
It’s important to note that a cash-out refinance will mean you’ll have to take out a new loan, which can impact your credit score. You'll want to review the loan's terms and conditions so you don't get locked into a much longer-term loan with higher interest rates. In that case, you could end up paying much more in interest than you would have with your previous mortgage.
Instead of dipping into your home’s equity for temporary cash, you can also share your home’s equity with an equity investment firm like Balance.
With Balance, you receive a cash investment for a piece of your home’s future value. You remain on title and continue to hold equity in your home.
As co-owners of your property, we’ll also cover our share of the fees and expenses. You’ll still be the official owner, and Balance shares in the costs, appreciation, and depreciation of your home.
The result? You get to stay in your property, and receive a lump sum for your equity in the property. If no other options are a fit for your needs, pursuing a home equity sharing agreement with Balance could be the best way to avoid financial catastrophe.
Plus, if you want to end the co-ownership, you can refinance into a traditional mortgage and buy Balance out by purchasing our share of the equity later. When you partner with Balance, your options are never limited, and we’re always willing to work with you.
Ultimately, sharing your home's equity with Balance could be a much better choice than a HELOC. When you partner with us and become a co-owner, we'll ensure you have the right to buy us out and refinance into a traditional mortgage. Plus, we'll make rebuilding credit, paying debts, or saving money easy. Contact us today to get started.
Sources:
Leaseback (or Sale-Leaseback): Definition, Benefits, and Examples | Investopedia
What is a home equity loan? | Consumer Financial Protection Bureau
Reverse Mortgage Guide With Types and Requirements | Investopedia
