HELOC, Home Equity Loan or Home Equity Investment? What U.S. Homeowners Should Know Before Tapping Their Equity
Three ways to turn home equity into cash, and how they differ on monthly payments, requirements and cost.
Many homeowners have more equity in their homes than they did a few years ago. At the same time, credit card balances and everyday costs keep climbing. So a common question comes up at kitchen tables across the country: which way of using that equity fits my situation?
There are three main options. Each works differently, and the right one depends on your budget, your credit and your plans for the home. Here is a plain-English look at all three.
The three main options
1. Home equity loan
You receive a lump sum and repay it in fixed monthly installments, with interest, over a set term. Lenders usually look closely at your income and your debt-to-income ratio (DTI). It suits people who want a predictable payment and can comfortably add one to their monthly budget.
2. HELOC (home equity line of credit)
A HELOC works like a credit line secured by your home. You draw what you need and make monthly payments, and the rate is often variable. It suits people who want flexibility and can handle payments that may change over time.
3. Home equity investment (HEI)
The newest of the three. A company provides a lump sum of cash today in exchange for a percentage of your home's future value. There are no monthly payments. Instead, you settle the investment within a set term, usually by buying it out with savings, refinancing, or a sale of the home.
Side by side
| Home equity loan | HELOC | Home equity investment | |
|---|---|---|---|
| Monthly payments | Yes | Yes | No monthly payments |
| How you get cash | Lump sum | Draw as needed | Lump sum |
| How cost works | Interest plus fees | Interest (often variable) plus fees | Fees plus a share of the home's value at settlement |
| Income / DTI review | Usually central | Usually central | No impact on credit profile or DTI during the term (Hometap) |
| When it ends | Fixed loan term | Draw and repayment periods | Within the investment term: up to 10 years at Hometap |
Loan and HELOC terms vary by lender. Home equity investment details shown are for Hometap.
How a Hometap home equity investment works
Hometap, a Boston company, has offered home equity investments since 2017. A Hometap home equity investment gives you access to your equity in exchange for a percentage of your home's future value.
- Access $15,000 to $600,000, up to 25% of your home's value
- No monthly payments for up to 10 years
- Settle the investment within 10 years through buying it out with savings, refinancing, or sale of your home
- No impact on credit profile or debt-to-income ratio during your investment term
- Use the cash for anything you'd like: paying off debt, renovating, an emergency fund, a small business or education
What it costs
A home equity investment is not free money, and it is worth understanding the trade-off. Hometap charges a fee when the investment is made, and at settlement it receives its agreed percentage of your home's value at that time. If your home's value rises, the amount you settle rises with it. Review your offer details carefully before signing anything.
Who it may suit, and who it may not
An HEI can make sense if you want cash for a clear goal but would rather not add a monthly payment to your budget. If you can comfortably handle a new payment and want to keep all of your home's future appreciation, a traditional home equity loan or HELOC may fit better. Many homeowners compare all three before deciding.
Do you meet the basics?
To be considered for a Hometap investment, you typically need a FICO score of 585 or higher, at least 25% equity in your home, and a property in a state where Hometap invests. Hometap invests in select states only.
Single-family homes, 1–4 unit properties and vacation homes can be eligible. Each application and property is reviewed individually, so approval is not guaranteed.
How to check
Hometap says you can see if you pre-qualify in less than two minutes. Have your approximate home value and mortgage balance handy. If you continue, a fuller online application follows, and you can review an offer before deciding anything.
See if you pre-qualify with Hometap →Available in select states. Not all applicants qualify.
Disclosure: This is sponsored content paid for by Hometap through an advertising partner and published by Nadlan Projects. It is provided for general information only and is not financial, legal or tax advice. Hometap Home Equity Investments are available in select states only. Not all applicants will qualify; a minimum FICO score of 585 and at least 25% home equity are required, and each application is evaluated individually. Investment amounts range from $15,000 to $600,000, up to 25% of home value. Fees apply. At settlement, Hometap receives a percentage of your home's value, which may be more than the amount you received. Hometap Equity Partners, LLC, NMLS ID# 2467867, 361 Newbury St, 5th Floor, Boston, MA 02115. Images are illustrative.