Best HELOC alternatives
There are times in life when we could all use a little extra cash in our bank accounts. The challenge is where to get the money. Homeowners are in a particularly good position to get extra cash based on their home equity and can apply for a home equity loan or home equity line of credit (HELOC).
However, not all homeowners will have sufficient equity to qualify or may be turned down for a HELOC for other reasons. Many homeowners choose HELOC alternatives which are not as financially risky because they do not require their home to be used as collateral. In this article we'll discuss HELOC alternatives.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What is a HELOC?
A
Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender. HELOCS come with a credit limit, a variable interest rate, and are secured by the equity in your home. HELOCs can be used for any type of expense, including home renovations, buying a second home or investment rental property, paying for college tuition, and paying-off high interest debt.
HELOCs are a form of “secured loan,” meaning that lenders require that the borrower put up security or collateral (in this case the borrower’s home) to secure the loan.
While HELOCs are an excellent way to get cash, keep in mind that because your home is used as collateral, if you default on the loan or fail to make on-time loan payments on time, the lender has legal recourse.
What can a HELOC be used for?
HELOCs can be used for any type of purchase. However, HELOCs are best used for purchases that increase your home’s value or improve your financial situation. Some examples include home renovation, paying emergency medical bills, renovating your home, or paying off high-interest debt.
What are the pros and cons of HELOCs?
Before applying for a HELOC, consider these
HELOC pros and cons:
Pros:
HELOCs are easily accessible. Once you are approved and receive your funds, you'll be able to use the money any way you choose using checks or a debit card for debit card for your HELOC account.
Interest-only payments during draw period. During the draw period most HELOCs charge interest-only, on the amount of the loan you use. Plus, you only pay interest on the amount of the loan you use.
Lower interest compared to credit cards. HELOCs start with a low variable interest rate that typically stays in effect for a 10-year draw period. The interest rate on a HELOC may be lower than interest charged on credit card debt and personal loans.
Cons:
Variable interest rates. HELOCs typically start with a variable interest rate which may change to a higher variable rate after the promotion ends or may convert to a fixed rate. As the rate goes up, some borrowers find it difficult to repay the loan at a higher rate.
Your home will be used as collateral. Because HELOCs are given based on the equity in the home, your home will be used as collateral. If you default on the loan, the lender can do a foreclosure and you could lose your home. Failure to make on-time loan payments will damage your credit score.
Risk of overspending. Having easy access to money makes it tempting to overborrow or spend the money on luxury purchases that aren’t necessary. Be sure to use your HELOC for the original intended purpose.
Why consider HELOC alternatives?
HELOCs and
home equity loans are examples of second mortgages. Any loan that uses your home as collateral is considered a lien on your home. If the loan is not repaid on time or in-full and according to the terms of the loan, the lender can foreclose on your home to recover the value of the money you owe. This makes HELOCs somewhat of a risk to homeowners. Using an alternative to a HELOC could be less risky if you become unable to repay the loan.
Alternatives to HELOCs
These are some common HELOC alternatives:
Home equity loan. Like a HELOC, a home equity loan lets homeowners borrow money from a lender against the equity in their home. While a HELOC has a variable interest rate, a home equity loan has a fixed rate. With a home equity loan, you pay interest on the entire amount of the loan you're approved for whether you use the money or not. Having a predictable fixed-rate loan may be a less risky alternative to a HELOC.
Cash-out refinance. A cash-out refinance involves getting a new mortgage at a new interest rate and borrowing more than what you owe on your current mortgage. The extra cash is given to you at closing. If you have a low interest rate on your current mortgage, refinancing to a higher interest rate just to get cash is probably not a good HELOC alternative.
Personal loans. A
personal loan is a type of “unsecured loan” granted to an individual based on their creditworthiness (not collateral) and is given in a lump sum. Repayments are made as fixed amount "installments" based on the loan's fixed interest rate over a fixed period of time. Monthly payments include paying back the principal balance and interest on the loan. Personal loans can be used for any type of expenses you choose.
Personal line of credit. This type of unsecured loan is also granted to an individual based on their creditworthiness (not collateral). Rather than giving the borrower a lump sum payment, the lender will approve a credit line, similar to a credit card, and the money can be used for any purpose. Interest is charged only on the amount that's used and monthly payments will vary each month based on the amount used. Interest rates may be fixed or variable depending on the lender.
Credit cards. If you need extra money in the short term, credit cards are easy to get. Many credit cards offer a promotional 0% APR (annual percentage rate) for a fixed period, usually 12 months.
Reverse mortgage. A type of home loan for homeowners who are 62 and older get money by borrowing against the value of your home. According to the Federal Trade Commission, with a reverse mortgage, the amount of money you can borrow is based on how much equity you have in your home. (Your equity is how much money you could get for your home if you sold it, minus what you owe on your mortgage.) While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky because the amount the homeowner owes to the lender goes up, not down, over time because lenders charge fees and interest on the amount they give you. The fees and other costs to borrow money this way can be higher than other HELOC alternatives.
Rent-back agreement. Also known as a sale-leaseback, this agreement is established when a home buyer allows the home seller to pay rent to remain in their home for a fixed period of time period after the closing and sale of the home. Because the seller has received the proceeds of their home sale, they'll have more cash on-hand to make a new home purchase. These agreements are typically short-term and require the sale of your home.
Bridge loans.
A bridge loan is designed to be used by a home buyer to bridge the financing gap between the sale of their existing home when money is needed for the purchase of a new home.
How soon can I get a HELOC?
A
HELOC can be obtained 30-45 days after the purchase of a home. However, borrowers will need to meet all of the
lender's requirements, including 15-20% equity in home, good debt repayment history, and more.
How do HELOC repayments work?
HELOC repayment is an easy process. The amount you owe will be based on the amount of the loan that you use. If you do not use any amount of your HELOC you will not owe any money; however, some lenders may charge an inactivity fee on an unused HELOC.
Can I pay off a HELOC early?
Yes,
paying off a HELOC early is possible. However, lenders often charge a prepayment penalty fee to customers who pay off and close a HELOC account before the end of the loan term.
Should I get a HELOC just in case?
You can
get a HELOC just in case and not use the funds. However, not using your HELOC could cost you in the form of lender fees and account fees. First, lenders charge fees you'll pay during the loan application process, such as an application fee, home appraisal, and closing costs. Once a loan is granted, some lenders charge an annual fee or membership fee, simply for having a HELOC account. Lenders may also charge a monthly or annual inactivity fee if you open a HELOC and do not use it.
Can I use a HELOC to consolidate debt?
Yes, you can
use a HELOC to consolidate debt or entirely pay off debt. This strategy can save you money if you have high interest debt, such as credit cards, that you are struggling to pay off.
Are HELOCs worth it?
A HELOC can be a great way to take advantage of your home equity to get the money you need to pay off high interest debt, make home improvements, and more. However, there are pros and cons of getting a HELOC. If you are trying to decide whether to use a HELOC alternative to make a purchase, be sure to explore all of the options discussed here. Although HELOCs can provide you with a significant amount of money, remember that your home will be used as collateral and failure to repay the loan can lead to foreclosure.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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