Alternatives to a Home Equity Line of Credit (HELOC)

Do you require money for a number of different home repair projects or for other unanticipated costs? A home equity line of credit, also known as a HELOC, is a common solution for covering these costs; nevertheless, it is possible that this will not be the best option for you. Take into consideration the following choices, any one of which may meet your requirements more satisfactorily.

Key Takeaways

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• It is more simpler than you may think to get access to a wide variety of DeFi platforms, ranging from bitcoin to NFTs and beyond. You are able to trade and keep assets with the highest possible level of safety when you use OKX, a leading supplier of financial services for digital assets. You may also connect existing wallets and be entered into a drawing for a chance to win up to $10,000 if you make a deposit of more than $50 via the purchase of cryptocurrencies or a top-up during the first thirty days of enrolling for the service. Find out more and sign up right now.
• It is more simpler than you may think to get access to a wide variety of DeFi platforms, ranging from bitcoin to NFTs and beyond. You are able to trade and keep assets with the highest possible level of safety when you use OKX, a leading supplier of financial services for digital assets. You may also connect existing wallets and be entered into a drawing for a chance to win up to $10,000 if you make a deposit of more than $50 via the purchase of cryptocurrencies or a top-up within the first 30 days after enrolling. Find out more and sign up right now.
• It is more simpler than you may think to get access to a wide variety of DeFi platforms, ranging from bitcoin to NFTs and beyond. You are able to trade and keep assets with the highest possible level of safety when you use OKX, a leading supplier of financial services for digital assets. You may also connect existing wallets and be entered into a drawing for a chance to win up to $10,000 if you make a deposit of more than $50 via the purchase of cryptocurrencies or a top-up during the first thirty days of enrolling for the service. Find out more and sign up right now.

0% Introductory Interest Rate Credit Card

Credit cards that provide introductory periods of no interest are an excellent choice for borrowing money for a limited time.

Method: You may be eligible to use a credit card instead of a home equity line of credit (HELOC) if you have an excellent credit score and a debt-to-income (DTI) ratio that is relatively low. First, find credit cards that provide a 0% introductory annual percentage rate (APR) on purchases, and then choose the card that has the longest promotional duration.

The costs of carrying a balance on a credit card with a 0% introductory APR are lower than the costs of carrying a balance on a home equity line of credit, and the introductory term may be longer than the low interest rate introductory period offered by certain HELOCs.

Con: If you want to maintain the promotional interest rate of 0% on your credit card, you can’t be more than 60 days behind on a single monthly payment. 1 You will be required to make fixed monthly payments that are sufficient to pay off the balance in full before the end of the promotional term, despite the fact that the card has a low minimum payment that must be made each month. Should you fail to do so, you will unexpectedly be required to make significant interest payments. If you pay off the whole loan during the promotional period, you will have a lot shorter time to repay the loan overall compared to what you would have with a home equity line of credit.

Reverse Mortgage Line of Credit

A reverse mortgage that provides the proceeds in the form of a line of credit is an excellent choice for older citizens who own their homes but do not want to continue making monthly payments.

Method: In order to qualify for a home equity conversion mortgage (HECM), the most common kind of reverse mortgage, you need to be at least 62 years old and have a sizable amount of equity in your house, as stated by the United States Department of Housing and Urban Development (HUD).23 The American Advisors Group estimates that the amount of “substantial” home equity to be between 50% and 55%, despite the fact that HUD does not define what constitutes “substantial” home equity. 4

Advantages: Over time, the proportion of your credit line that is still utilized will increase. Even if the value of your home or the performance of the economy drops, you will not lose access to a HECM line of credit that you have established. 5 In order to be eligible, you are not need to have a certain income or credit score. 3 If you later come to the conclusion that you would want to receive regular monthly payments, you may be able to modify the payment plan associated with your reverse mortgage. 6

Con: A reverse mortgage requires a significantly higher amount of equity than a home equity line of credit does. The costs associated with reverse mortgages are not exactly cheap. It’s possible that these loans will be hard to understand (to the point where some reverse mortgages are considered predatory).They may also create problems for couples who are not borrowing the money. You should take a crash course on the benefits and potential drawbacks of getting a reverse mortgage before you actually receive one.

Cash-Out Refinance

Homeowners who are dissatisfied with their existing mortgage may find relief via the process of cash-out refinancing.

A first mortgage is similar to a cash-out refinancing, which is a kind of second mortgage. It does this by exchanging your existing first mortgage for a new one that is for a larger amount. This is the mortgage that was utilized to acquire your home or to refinance it at a reduced interest rate. After the payment of your closing costs has been subtracted from the total amount of the loan profits, you will have the leftover money to spend in any way that you see appropriate. 7

A cash-out refinancing may be a superior solution than a home equity line of credit (HELOC) for you if you are able to receive a better interest rate and you need the dependability of borrowing at a set rate. In addition to this, you’ll only have one loan to repay.

Con: If the length of your new mortgage is longer than the period of your old mortgage, you may wind up paying more interest over the course of the loan even if you are able to get a lower interest rate. Also, the closing expenses for a cash-out refinancing would most likely be the same as those for a standard mortgage loan, which range from 2% to 5% of the amount borrowed; however, lenders may waive closing costs for a home equity line of credit (HELOC). 89 To provide one example, Bank of America pays for all of the closing costs for HELOCs with balances of one million dollars or less. 10

Home Equity Loan

Anyone who is interested in borrowing a predetermined sum of money at a rate of interest that is also predetermined might consider applying for a home equity loan.

A home equity loan can make more sense than a home equity line of credit (HELOC) if you already know how much money you want to take out as a loan. A fixed interest rate and predetermined payment schedule are also features of a home equity loan. Your mortgage will serve as collateral for the loan, and the amount you are approved for will be based on the value of your house, your credit score, and your debt-to-income ratio (DTI). 11

A home equity loan often has a very low interest rate since the loan is secured by the home that is being used as collateral for the loan. The U.S. Bank is offering fixed interest rates of 5.90% for both a 10-year and a 15-year term beginning in June 2022. 12

On a home equity line of credit (HELOC), the interest rate will often be higher than the initial interest rate. If you are unable to repay your home equity loan, just as if you were to default on a first or second mortgage, you run the risk of losing your property. If you choose a repayment period of 30 years, the total interest you pay might end up being rather significant.

What Are My Options if I Don’t Qualify for a HELOC?

Can You Get a HELOC if You Already Have a Mortgage?

HELOCs, which are also known as second mortgages, are often obtained by homeowners while they are still making payments on their primary mortgage, which is more usually referred to as a first mortgage. To qualify for a home equity line of credit (HELOC), you need to have the appropriate loan-to-value ratio, even if you already have other debts that are secured by your property. It’s possible that you won’t be approved for a home equity line of credit (HELOC) if the amount of money you owe on your mortgage is more than 85% of the value of your home, although limits might vary from lender to lender. 14

What Are the Drawbacks of a HELOC?

A HELOC could be damaging to your financial circumstances. It is possible that you may no longer be able to afford your payments if the interest rates continue to grow. When you have access to credit with a low interest rate, it is tempting to overspend since it is easier to make interest-only payments during the draw period than it is to start making payments that include both the principal and the interest. This might lead to payment shock in the future. 15

The Bottom Line

Home equity lines of credit are merely one of several accessible financing options for homeowners. If you want the certainty of a predetermined interest rate, a loan against the equity in your house can be a better option for you. In other circumstances, a cash-out refinancing, a cash-back credit card, or a line of credit secured by a reverse mortgage may be more suitable financial options.

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