8 Alternatives to HELOCs

1. Home Equity Loan

A home equity loan is a type of second mortgage that distributes your funds in one lump-sum payment upon approval. Like a HELOC, the loan is secured by your home. But unlike a HELOC, which works more like a credit card you can repeatedly draw from up to your limit, a home equity loan gives you a fixed amount of money you pay back with a fixed interest rate and a term from five to 30 years. Most lenders will let you borrow up to 75% to 85% of your available home equity, depending on your credit and other qualifications.

You might prefer a home equity loan over a HELOC if you already know exactly how much money you need and when you need it. For example, if you're funding a kitchen remodel or covering a tuition bill, you'd benefit from a fixed rate and monthly payments that don't change during your loan's term. By contrast, HELOCs allow for multiple withdrawals, which may work out better if you're funding a project that will be completed in stages. Most HELOCs have variable interest rates, meaning your payment could change during the repayment term.

Learn more: How to Calculate Home Equity

2. Home Equity Investment

You might consider a HELOC alternative like a home equity investment (HEI), also known as a home equity sharing agreement, if you have equity but don't qualify for a loan. That's because an HEI isn't a loan at all. It's a contract between you and an investment company that gives you a lump sum upfront. In return, you agree to give the company a share of your home's future value or appreciation.

Since it's not a loan, there are no monthly payments or interest to pay. Instead, you agree to pay the company back, often in 10 or 30 years. The amount you'll pay will depend on how much your home is worth at that time. Instead of adding a second mortgage like a HELOC, the HEI provider places a lien on your home until you repay the contract, usually when you sell or refinance your home.

3. Cash-Out Refinance

A cash-out refinance can make more sense than a HELOC if you want to keep things simple with one fixed-rate mortgage, ideally with a lower interest rate than your existing mortgage. This is another home equity lending option, but it allows you to replace your current loan with a new, larger one and take the difference as cash.

Most mortgage lenders allow you to borrow up to 80% of your home's value, which includes your existing balance, and the amount you're cashing out.

Example: If your home is worth $500,000 and you owe $300,000, you could refinance into a $400,000 loan and receive $100,000 in cash.

Learn more:Pros and Cons of a Cash-Out Refinance

4. Personal Loan

One of the downsides to a HELOC is that you must secure the credit line with your home. A personal loan gives you an alternative option for funds without putting your home on the line. These loans are usually unsecured and offer borrowing amounts up to $100,000. Personal loans typically have fixed rates and repayment terms between one and seven years.

Rates vary by lender and credit score, so you could come across annual percentage rates (APRs) between 8% and 36%. Some lenders charge an origination fee from 1% to over 10% of the loan amount, while others don't charge these fees at all. If the lender approves your application, you should receive funds in your account within a week, or as soon as one day with some online lenders.

Learn more:Personal Loan Requirements to Know Before You Apply

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5. Reverse Mortgage

If you're 62 or older and have significant equity in your home, you might explore the benefits and downsides of a reverse mortgage as an alternative to a HELOC. You could use the funds to cover medical expenses, home renovations or to supplement your retirement income. One unique feature of reverse mortgages is that you don't have to make monthly mortgage payments.

You can receive the money as a lump sum, fixed monthly payments, a line of credit or a mix of both. It's particularly helpful if you need extra income or help covering everyday expenses. With a reverse mortgage, you can tap into what's likely your biggest asset—your home—without having to sell it.

The loan comes due when you sell the home, move out for 12 months or more, die or under certain other conditions. If you pass away, your heirs can choose to repay the balance or sell the home. Still, you must consider the pros and cons of reverse mortgages before making a decision.

Learn more:How to Pay Back a Reverse Mortgage

6. 401(k) Loan

You may be able to bypass getting funds from a lender by borrowing from yourself. More specifically, you may be able to pull money from your 401(k) retirement plan and repay your account with interest. If your employer allows for 401(k) loans, you may request up to 50% of your vested balance up to $50,000, and typically receive the funds with your next paycheck. You can use the money for any purpose, and unlike a HELOC or personal loan, there's no credit check or lender approval process.

Generally, you must repay the loan within five years with interest. Remember, these funds are being returned to your retirement savings.

Tip: Be careful about changing jobs while you're repaying a 401(k) loan. You may need to repay the loan much sooner. If you're unable to repay the loan by the deadline and you're under 59½ years old, you may owe income taxes on the unpaid balance and a 10% early withdrawal penalty.

7. Bridge Loan

A bridge loan can help you come up with the necessary funds when you're selling your home and purchasing another one. These funds can help with your down payment and closing costs, and you can repay the loan once your current home sells.

This short-term loan typically must be repaid in six to 12 months. One advantage is that you can use the loan to pay off your old mortgage if you qualify for a large enough amount. That means you won't have to make a sales-contingent offer on the new property, which could strengthen your offer.

Learn more:How to Buy and Sell a House at the Same Time

8. Credit Card

If you need to borrow a smaller amount you could comfortably repay quickly, a credit card might be a practical alternative to a HELOC. For example, if you need to pay for an unexpected expense or want to consolidate high-interest debt, a 0% introductory APR credit card could give you up to 21 months to pay it off interest free.

Credit cards operate much like a HELOC. It's a revolving line of credit that allows you to borrow up to a certain limit and pay interest only on the amount you use. You can also keep borrowing, up to your limit. Credit cards also may come with extra perks like rewards and fraud protection, but keep in mind they often impose high interest charges you must pay if you don't pay your balance by your due date.

Learn more: What to Consider When Choosing a New Credit Card

Improving Your Credit Could Boost Your Options

A home equity line of credit can be a strong financing option if you need to cover a large expense and want to repay it over a longer time horizon. You'll enjoy flexible repayment terms and potentially lower interest rates. But a HELOC isn't for everyone, especially if you'd rather not tap into your home equity or use your home as collateral. You might qualify for alternative options that better suit your goals and financial situation.

Whether you decide on a HELOC or another financing tool, improving your credit may expand your options and result in more favorable terms. Consider checking your credit report and FICO^® Score^Θ for free with Experian. You'll see what lenders see when they review your credit. If your score isn't where you want it to be, take steps to improve it to potentially give yourself greater options.