HEI vs. HELOC, and which option fits you

You have options for putting your home equity to work. If you're comparing an HEI vs. HELOC, start with how each option works. 

A home equity line of credit (HELOC) is a revolving line of credit secured by your home. You can borrow up to a set credit limit, and you make monthly payments if you have a balance.

A home equity investment (HEI) takes a different approach. An investor gives you cash in exchange for a stake in your home. You don’t make monthly payments on the amount you receive. A buyout is due when you sell or the agreement ends. 

The right fit comes down to where you are financially and how much certainty you want.

What is a HELOC?

A HELOC is a revolving line of credit secured by your home. It's also considered a second mortgage if you have a primary mortgage. Since a HELOC uses your home as collateral, you could lose your home if you don't repay the loan as agreed.

During the draw period, which typically lasts five to 10 years, you can borrow, repay, and borrow again up to your credit limit. Once the draw period ends, the repayment period begins. You can no longer borrow from the line of credit, and you repay the balance according to your loan terms. Repayment periods typically range from 10 to 20 years.

Most HELOCs carry variable interest rates, which means your interest rate could shift as the market moves. Some lenders, including Achieve Loans, offer a fixed-rate HELOC that locks your rate in for the life of your loan.

To learn more about the mechanics of a HELOC, visit How a HELOC Works.

What is a home equity investment (HEI)?

A home equity investment gives you cash in exchange for a stake in your home, or a share of your home’s future value. Unlike a HELOC, an HEI doesn’t require monthly payments on the amount you receive. Instead, you'll owe a lump sum when you sell the home or when the term ends.

As with a HELOC, an HEI often requires a lien on the property. A lien could make it harder to borrow against the home or sell it until the HEI is paid off. It also means the HEI provider could foreclose on the home if the terms of the contract aren't met.

HEIs can have very uneven terms. For example, an investor might pay you 10% of your home's value in cash. In exchange, you would repay the amount borrowed plus 25% of your home's future appreciation.

How much you need to pay the investor at the end of the term (or upon selling the home) is based in part on your home’s value at that time. So if your home’s value increases, you'll need to pay more to the investor. The exact percentage you receive and must repay varies by agreement. The agreement will also lay out the specific settlement date or term.

HEI vs. HELOC key differences

An HEI and a HELOC could both let you access your home equity in different ways. The main differences between a home equity investment and HELOC involve monthly payments, total cost, qualification, risks, and how changes in the value of your home affect what you owe.

Monthly payments and cash flow

This is one key area of difference between the two products. A HELOC typically requires monthly payments when you have a balance. If you have a zero balance, however, you likely won't have any monthly payments.

The monthly payment can vary during the draw period, depending on the lender and loan terms. Some lenders might require payments that cover interest only, while others might require principal and interest.

An HEI doesn’t require monthly payments on the amount you receive. You repay a lump-sum amount when you sell your home or the agreement ends. The amount you owe depends on your home’s value and the terms of your contract

Total cost

A HELOC’s cost generally includes interest and lender fees. Most HELOCs have variable interest rates, although some lenders offer fixed-rate HELOCs. Achieve Loans offers a fixed-rate HELOC.

An HEI has a different cost structure. Instead of paying interest each month, you give the investor a share of your home’s future value according to the terms of your agreement. The total amount you repay depends on the initial value of your home, as well as how your home’s value has changed since then.

The initial value is typically based on an appraisal at the time of agreement, and a low appraisal could cost you more when it's time to pay up. The contract may even allow the provider to reduce the starting value of your home in its calculations. And while some HEI providers offer cost caps that limit how much you have to pay back, these can be so high as to offer very little actual protection.

How you qualify

Lenders typically evaluate several factors when you apply for a HELOC, starting with your home equity and combined loan-to-value (CLTV) ratio. The CLTV is a measure of how much you owe on your home versus its market value.

They also look at your credit, income, and debt-to-income (DTI) ratio. Lenders want to make sure you can afford the loan and are likely to repay it. Exact home equity loan requirements vary by lender, so there isn’t one credit score or DTI requirement that applies to every HELOC.

HEI qualification requirements aren't standardized, and may not be well-regulated in your area. Each provider sets its own criteria, so reviewing terms directly with the company is the most reliable way to understand what a specific agreement requires.

HELOC pros and cons

A HELOC gives you a revolving line of credit secured by your home. During the draw period, you can borrow, repay, and borrow again up to your credit limit. Most HELOCs have variable interest rates, although some lenders offer fixed-rate options. If you use the funds to buy, build, or substantially improve the home securing the loan, the interest could be tax-deductible if you meet applicable IRS requirements.

If you have a balance, your HELOC will require monthly payments. Payment amounts can vary during the draw period depending on the lender and loan terms, and payments can change when the repayment period begins. Your home is used as collateral. If you don't repay the loan, you could lose your home.

HEI pros and cons

The primary home equity investment pros and cons lie in how these agreements are structured. An HEI can give you access to your home equity without monthly payments on the amount you receive. Instead, you agree to give the investor a share of your home's future value according to the terms of the agreement.

Most HEIs require a lien on the home, potentially giving the investor the ability to foreclose on the home if you don't repay as agreed. This could also make it harder to borrow against the home or to sell the home until the HEI is repaid.

The cost of an HEI depends in part on how your home’s value changes before you settle the agreement. An HEI is a gamble, since you may need to turn over a large share of equity at the end of your term if your home's value has increased and/or your loan terms were uneven. 

HEIs are relatively new products and carry significant risks. They're not standardized and may not require common loan disclosures or safeguards. Terms can also be confusing or unclear (sometimes on purpose), and there's no guarantee you get a fair or equitable deal.

Because HEI terms and qualification requirements vary by provider, review the agreement carefully to understand how the investment works, how settlement is calculated, and what options you have when the agreement ends. It may be worth consulting a real estate attorney or financial advisor to make sure you understand everything and terms are actually fair.

Which one is right for you?

If you weigh an HEI vs. a HELOC, a HELOC should generally be your first stop. HELOCs let you tap into your home equity with a flexible line of credit that can be reused during the draw period. You only pay interest on what you borrow and could have up to 30 years to repay your HELOC. You also get standard loan disclosures and safeguards.

You might consider an HEI if you want to access your home equity without a monthly payment and are able to get a contract with a fair exchange. You also need to be comfortable risking potential future equity if your home's value increases substantially during your HEI term. This may work best if you plan to sell the home within a few years of getting the HEI.

Before choosing either option, compare the payment structure, total cost, qualification requirements, and how changes in your home's value could affect what you owe. Whichever way you lean, compare the pros and cons of a HELOC against an HEI first. 

Prefer a HELOC without rate surprises? Check out the Achieve Loans fixed-rate HELOC

Achieve Loans offers a fixed-rate HELOC for homeowners who want a revolving credit line with a fixed interest rate. The HELOC has a five-year draw period, and Achieve Loans requires full principal-and-interest payments during the draw period. 

Find out if you qualify through Achieve Loans.