Alternatives to a home equity loan

Home equity line of credit

Home equity lines of credit (HELOCs) also require borrowers to use the equity in their homes as collateral. However, home equity lines of credit work as a line of credit borrowers can tap into as needed, and they typically come with variable interest rates that can change based on market conditions. Because HELOCs let borrowers access as much money as they need (up to approved limits), monthly payments for this borrowing option can vary, too.

While repayment terms for HELOCs can be different from one loan to the next, most have a draw period (usually 10 to 15 years) and a repayment-only period of 15 or 20 years. This is worth noting since you can only borrow against the line of credit during the draw period, but you can wind up with payments that last for up to twice as long.

Cash-out refinance

A cash-out refinance is another option to consider if you want to access equity in your home. Personal finance expert Robert Farrington of The College Investor said this home borrowing option involves getting a new mortgage for a higher amount than your existing mortgage, except for one main difference – "You'll get paid that difference in cash," he said.

As an example, say you owe $200,000 on a home that's currently worth $600,000. In that scenario, you could take out a home mortgage for $300,000 with a cash-out refinance and get $100,000 back at closing (minus fees and closing costs that apply).

Reverse mortgage

A reverse mortgage lets homeowners aged 62 and older borrow against their home equity and receive a lump sum of money or monthly payments. These loans also require borrowers to use their home as collateral for the loan, although the title of the home stays with the homeowner.

Reverse mortgage loans are geared toward older homeowners who have a lot of home equity but need more cash for living expenses. They let homeowners borrow against their home's value and access money they can spend how they want without having to move.

According to the Federal Trade Commission (FTC), the reverse mortgage must be repaid when you die or move out of the home. This usually requires you or your heirs to sell the property.

Home equity sharing agreement

According to Farrington, home equity sharing agreements are one of the newest vehicles to tap equity in a home. These are not loans, however. Farrington pointed out that home equity sharing agreements are contracts that state you'll share the future equity of your property with the company you signed with.

Potential benefits of these agreements is that you can access the equity in your home without facing new monthly payments. "And if the value of your home drops, the company will also share in some of the risk," said Farrington.

There are downsides if the value of your home rises significantly during the agreement. In that case, you may pay more in fees for the amount you borrowed than you would have with a traditional loan product. Farrington also pointed out that many of the home equity sharing companies have a contract period of 10 to 15 years, after which you either need to sell, refinance or buy them out of their contract.

"This could force you to make a financial decision you’re not prepared for," he said.

Home sale-leaseback

Home sale-leasebacks are another newer borrowing option when it comes to accessing home equity. Essentially, these agreements come from companies that purchase your home and lease it back to you.

Homeowners who opt for a home sale-leaseback get access to a lump sum of cash and can continue living in their home without owning it. These agreements also give homeowners the chance to sell their home without dealing with showings or uncertainty.

Personal loan

Personal loans are similar to home equity loans in that they come with fixed interest rates, fixed monthly payments and set repayment terms. However, personal loans are unsecured loans with no collateral requirement, meaning you do not use your home equity as collateral when you apply.

Personal loan rates can also be competitive, although they tend to be more so for people with high incomes and very good to excellent credit. Repayment terms for personal loans can last up to 144 months and longer with some loan companies, and loan amounts can be limited to $35,000, $50,000 or even $100,000 depending on the lender.

Personal line of credit

A personal line of credit also lets you borrow money without using your home as collateral. However, a line of credit gives you an amount of money you can access when you need it and as you need it, and typically comes with a variable interest rate.

Lines of credit can have unpredictable monthly payments since you only have to pay back amounts you borrow. However, you only pay interest on amounts you borrow, which can help you limit your costs.

Bottom line

Home equity loans let you access a lump sum of money using your home's equity as collateral, but there are other alternatives to consider if you need to borrow money. Some let you access money without using your home as collateral at all, whereas others rely on your home equity but under different terms and conditions altogether.

Our advice? Compare home equity loan costs and borrowing caps to what you could accomplish with other loan options. Once you compare how much money you can access and how much it will cost you with all available options, you can make an informed decision.