Alternatives to a HELOC
Looking for ways to use the value built up in your home?
You may have come across home equity lines of credit, or HELOCs, which can offer flexible access to funds and competitive interest rates. But depending on your goals, financial situation, or market conditions, you might want to consider other options.
Below, we explain five common alternatives for people who want to unlock home equity without a HELOC. This is not financial advice, and we recommend speaking with a qualified financial professional before making any decisions.
1. Home sale leasebacks
A home sale leaseback lets you sell your home to an investor for a lump sum, then stay in the home as a renter under a lease agreement. This is not a loan, it’s a contract.
Some contracts give you the option to buy the home back in the future. Often, there are no income or credit score requirements. Keep in mind that you:
- Will no longer own the home
- Won’t benefit from any future increase in home value
- Must review the lease terms carefully before committing
This option may provide access to more funds than other equity alternatives. But it also means giving up homeownership, so it’s important to weigh it against other possibilities.
2. Home equity sharing agreements
A shared equity agreement gives you access to a portion of your home’s value without taking out a traditional loan.
You receive a lump sum from an investor, and in return, they receive a share of your home’s future value. You don’t make monthly payments or pay interest, but you do agree to repay the original amount along with a percentage of any value your home gains over time.
This can be a helpful option for homeowners who want to avoid debt or who may not qualify for a traditional loan. Just be aware that if your home increases significantly in value, you could owe more at the end of the agreement.
3. Cash-out refinance
With a cash-out refinance, you replace your existing mortgage with a new mortgage for a higher amount and take the difference in cash.
For example: If your home is worth $500,000 and your mortgage balance is $150,000, you could refinance into a $300,000 loan. You would pay off the $150,000 mortgage and keep the remaining $150,000 in cash. In this hypothetical scenario, the new mortgage would be for $300,000.
Pros:
- You may get a lower interest rate than your current mortgage
- You can use the funds for any purpose
Cons:
- Your monthly mortgage payment may increase
- There are closing costs and fees to consider
4. Reverse mortgage
A reverse mortgage may be a good fit for older homeowners who have built up significant home equity. This loan allows you to borrow against your equity and receive the funds as a lump sum, monthly payouts, a line of credit, or a mix of those options.
You’re not required to make monthly payments on a reverse mortgage as long as the loan requirements are met. To avoid default, you must:
- Pay property taxes, fees, and homeowners’ insurance
- Keep the home in good condition
- Live in the home as your primary residence
Other loan terms and conditions may apply.
The most common reverse mortgage is the FHA-insured Home Equity Conversion Mortgage (HECM)1, which is available to homeowners aged 62+. HECM loans include mandatory counseling with a HUD-approved counselor and come with capped fees and consumer safeguards.
Proprietary reverse mortgages, offered by private lenders, may offer higher loan limits for people with substantial equity in their homes. Age limits can vary with a proprietary reverse mortgage, but they could be an option for homeowners as young as 55.
The loan becomes due when the last borrower moves out, sells the home, passes away, or fails to comply with the terms of the loan. At that point, the home is typically sold to repay the loan. Heirs may also choose to pay off the balance and keep the property.
Note: A reverse mortgage is a loan and must be repaid. Interest and fees are added to the loan balance over time.
5. Reverse mortgage line of credit
This option works like a reverse mortgage but gives you access to funds through a line of credit that can grow over time.
Unlike a traditional HELOC, a reverse mortgage line of credit:
- Cannot be canceled or reduced due to home value changes
- Increases in available funds over time (based on the terms of the loan)
- Does not require monthly payments as long as loan terms are met2
This can provide peace of mind, especially for retirees looking to supplement their income or prepare for future expenses.
Choosing the right option
Your age, credit history, income, home value, and goals all affect which solution is best for you. Some homeowners prioritize staying in their home, while others are focused on maximizing the funds they can access.
Talk to a licensed loan advisor or financial professional to walk through your situation. They can help you compare options and find the right fit for your needs.3
[Disclaimers]
1) These materials were not provided by HUD or FHA and were not approved by FHA or any government agency.
2) The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
3) While the products listed above are available on the market, not every product is offered by Finance of America Reverse. Please contact us to learn which options we provide.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
