Home Equity Loan Alternatives: A Complete Guide

Do you have a big payment on the horizon but need some extra cash to cover it? Are you looking to consolidate your debt from several high-interest payments into one low-interest payment? There are plenty of times in life when you may need cash at the ready but don’t know the best source to get it. A home equity loan is a popular method to take advantage of the equity in your home and turn it into the cash you need, but it’s not your only option.

A home equity loan is a type of second mortgage that uses the equity in your home as collateral for a one-time, lump sum payment. Once you receive the money, you pay it back like you pay your original mortgage, with monthly payments based on a fixed interest rate over a set number of years. However, there are many home equity loan alternatives that may be a better option for you.

Why Consider Home Equity Loan Alternatives?

Home equity loans are an excellent resource for big purchases that pay off in the long run, like your child's college education or home improvements to increase your home's value. They can also be a valuable tool to consolidate debt from multiple sources with high-interest rates. But they're not always suitable for every person or purchase.

Home equity loans are paid in one lump sum, so if you have a long-term project with an uncertain budget, it can be hard to predict how much to borrow. Home equity loans also come with the same risk as your original mortgage: Your home could be used as collateral if you don't make the payments. Also, if you don't have at least 15% – 20% equity in your home, home equity loans may not even be an option for you.

Alternatives To Home Equity Loans

Luckily, there are plenty of home equity loan alternatives for those who want to explore other options. If you don't know exactly how much money you need, don't have enough equity in your home or don't want another mortgage payment, check out the alternatives to home equity loans below.

1. Home Equity Line Of Credit (HELOC)

A home equity line of credit (HELOC) is a type of second mortgage that functions differently than a home equity loan. With a HELOC, you can draw from a line of revolving credit instead of receiving a lump sum of money. Like a credit card, you can take out an amount of money up to your credit limit and make monthly payments toward whatever you take out.

The timeline of a HELOC breaks down into two periods. During the draw period, you can take out cash from the HELOC for a specific time, typically 5 to 10 years. You will have monthly minimum payments to cover the interest of the loan. Once the draw period ends, you can no longer take cash out, and the repayment period begins. During this period, you pay off the interest and principal by the end of the loan term, typically 10 – 15 years after the draw period ends.

With a HELOC, you can take out cash only when you need it. It may be preferable to a home equity loan if you are paying for a long-term project and don’t know the exact cost ahead of time, like a home improvement project. A downside to a HELOC is that the interest rates are often adjustable as opposed to the fixed rates of a home equity loan. The biggest downside is the same as a home equity loan: since you use your home as collateral, you could lose it if you don’t pay off the loan.

That’s why you must meet a lender’s requirements to get a HELOC. To qualify for the loan and to determine how much you can receive, you must have the following:

• An updated appraisal of your home’s value
• At least 15% – 20% equity in your home
• A 620 credit score or higher
• A debt-to-income (DTI) ratio of around 43% or less

Rocket Mortgage^® doesn’t offer HELOCs at this time.

2. Personal Loans

If you don't have enough equity in your home to qualify for a home equity loan or HELOC, a personal loan may be right for you. There are two types of personal loans: unsecured and secured. Most personal loans are unsecured, meaning you don’t have to offer anything you own as collateral for the loan. However, unsecured loans require higher credit scores and interest rates and offer lower amounts of money to compensate for this lack of security.

A secured personal loan requires something you own as collateral for the loan. Lenders may accept your car, bank account or 401(k) account as collateral if you don't have home equity to offer. While secured loans put these assets at risk if you don't pay off the loan, you're more likely to qualify for the loan at a better rate if you offer collateral.

Personal loans are a good alternative for those with great credit scores who need a smaller amount of money than home equity loans or HELOCs offer. To see if you qualify, you can check out our friends at Rocket Loans℠.

3. Cash-Out Refinance

A cash-out refinance is a great home equity loan alternative if you want to avoid managing two mortgage payments simultaneously. It's similar to traditional refinance in that you pay off your existing mortgage and sign a new one. But with a cash-out refinance, you can get a larger mortgage and take out up to 80% of the value of your home equity in cash. Once the process is complete, you could have money from your equity, lower monthly payments and still only one mortgage to pay.

Check out our refinance calculator to see if you can get cash out of your home and a smaller mortgage payment.

The Bottom Line

There are many enticing alternatives to home equity loans, but the best option depends on your financial situation. If you’re ready to get a handle on high-interest debt or get started on that kitchen remodel you've always wanted, apply online to begin the approval process for the best loan for your needs.