A HELOC is an in-demand way of financing that has several nuances to consider.
Personal loans, mortgages, leaseback arrangements, cash-out refinancing, credit cards and home equity agreements are alternative methods of obtaining a loan. Each has its own benefits and drawbacks.
Among all available options, a HELOC can be reasonably considered one of the most popular forms of financing. This method entails obtaining funds by providing collateral, namely, the equity in your property. But you might want to consider alternatives to HELOC that involve less inherent risk, and may offer more favorable financing terms.
Despite the flexible terms and conditions offered by banks, the main advantage of a HELOC – using the equity in your home as collateral – can sometimes turn into a risk. Also, the threshold for obtaining a HELOC is high, with lenders carefully examining your financial history and evaluating indicators such as credit rating, income and amount of debt you carry.
So let's take a closer look at the alternatives to HELOCs.
A home equity line of credit, or HELOC, provides a convenient way to get funds, using your home equity to prove your creditworthiness. Here, the lender sets a loan limit, and you can borrow money over an agreed period.
The loan amount is calculated based on the value of the property. You then can withdraw money you need when you need it.
A HELOC is different than a home equity loan (HEL). A home equity loan is an agreement between a lender and a borrower, under which the creditor grants a lump sum to the borrower, who is obliged to make a fixed payment each month until the loan is fully paid off.
While a HELOC may seem quite attractive and affordable to many homeowners, it’s important to understand the pros and cons.
Advantages of a HELOC
No fees upon concluding an agreement
Lower interest rates for homeowners with high credit scores
Ability to draw funds as needed
Disadvantages of a HELOC
Higher interest rate than other loan options
Fees that vary widely depending on the property's value and the lender
Adjustable interest rates (often)
Risk of losing the property if payments are missed
Before making the decision to obtain a HELOC, a potential borrower can consider other types of loans, and carefully examine their terms and conditions.
1. Personal loan
A personal loan is generally defined as a loan granted to individuals to purchase consumer goods or services. (Mortgage and car loans are typically considered separate types of financing.) The main features of a personal loan are the short repayment period, and the ability to borrow amounts as small as $1,000.
A personal loan is considered an unsecured loan, which means it is not backed up by collateral (such as a home). This type of loan is granted according to an assessment of credit history, cash flow, income and debt-to-income ratio.
Advantages of a personal loan
Useful for a variety of purposes, from debt consolidation/payoff to paying for medical expenses or large purchases
Variety of loan terms
Disadvantages of a personal loan
Higher interest rate than some other types of financing
Relatively small amount of funds issued
A home sale leaseback is another alternative to a HELOC. It involves selling your property to the lessor and then using it under the terms of a lease. Leaseback agreements can be an option if you are a property owner and need to get financing in a short amount of time.
There are two parties involved in the deal: the seller (lessee) and the buyer (lessor), who become the tenant and the landlord, respectively.
Still, the lessee continues to use the property under the leasing agreement and makes regular payments until the full amount owed is paid.
Advantages of a home sale leaseback
No need to search for a buyer for your home and gather documentation for closing
The agency that officially possesses the property according to the agreement incurs the obligation for all the expenses related to property insurance and taxes.
Disadvantages of a home sale leaseback
The home seller may be responsible for paying costs and fees at closing.
The rent on a home can be much higher than the market value of the rental home or similar payments on a mortgage loan.
Cash-out refinancing is a financial process of replacing a previous mortgage loan with a new one, and in which the new mortgage amount is more than the previous loan. This allows the borrowers to refinance and get cash. Typically, a cash-out refinance makes sense when the interest rate that can be obtained on the new mortgage is lower than the existing one.
For a cash-out refinance, you will need to provide the title documents for the property, an appraisal of the property, the loan documents (loan agreement) and the amount you owe on the existing mortgage. Once you complete the refinancing, the additional amount of cash will be issued to your bank account.
Advantages of a cash-out refinance
Reduced interest rate
Extended repayment period
Disadvantages of a cash-out refinance
Financial documentation required
Closing fees; total costs may exceed the potential benefits of lower interest rates
Resetting of mortgage term
Credit cards are payment cards that allow the customer to pay for goods and services with bank funds. In effect, you are borrowing money to pay for goods and services.
Failure to make a minimum payment may result in a breach of contract, delinquency and deterioration of credit history. Using credit cards for purchases can be convenient, but comes with significant responsibility.
Advantages of credit cards
Convenient, fast way to pay for needed goods and services
Positive impact on credit reports and scores with consistent on-time payment
Disadvantages of credit cards
Interest rates on credit cards are generally higher than on traditional loans.
Accumulating interest on funds borrowed but not paid back in full at the end of every billing cycle can be crippling.
Fees imposed by the credit-card issuer
A home equity agreement (HEA) involves a large lump-sum payment in exchange for a percentage of a home’s future value. There are no monthly installments or interest charges.
Advantages of a home equity agreement
No monthly fees or interest
Fast access to funds
Ability to use the funds to pay down debt or cover large life purchases
Flexible income requirements; low credit score requirements
Disadvantages of home equity agreement
If you want to know more about HEAs, the Unlock Technologies team can help. With the goal is to make home equity available to homeowners, regardless of their current financial situation, Unlock’s HEAs can offer cash of up to $500,000.