The short answer
For most people who qualify, a HELOC costs less. In our standard example ($100,000 against a $750,000 home with a $300,000 mortgage, 4% growth, settled after 7 years), the home equity investments we can model cost 13.7% to 15.9% a year, compared with about 8.5% for a HELOC.
An HEI earns its place when a monthly payment isn't workable, or when a HELOC isn't available to you. Already denied for a HELOC? See your alternatives.
Side by side
| Feature | Home equity investment (HEI) | HELOC |
|---|---|---|
| Monthly payment | None | Yes, interest at least, and often principal later |
| What you pay for the money | A share of your home's value or gain at settlement | Interest, usually at a variable rate |
| If your home booms | Costs more, until any cost cap applies | No change; set by the rate |
| If your home is flat | Still costs 3.5% to 13.0% a year in our example, from multipliers and discounted starting values | No change; set by the rate |
| Credit and income | Looser; some accept scores from 500 and there's no income test | Stricter; income and credit are underwritten |
| How it ends | One payment when you sell, refinance, buy out, or reach the end of the term | You repay the balance over time |
| Your home's appreciation | You give up a share | You keep all of it |
Yearly cost is measured on the cash you actually receive, after the provider's fee and about $1,500 of closing costs. Measured on the full investment instead, it's lower: in our standard example ($100,000 on a $750,000 home, 4% yearly growth, 7 years), Hometap is 13.1% a year instead of 14.1%.
What a HELOC costs
A HELOC is a line of credit secured by your home. You pay interest on what you draw, usually at a variable rate, and repay the balance over time, often after an initial draw period. The cost is easy to understand: it's the rate. Your home's future value doesn't change what you owe.
What an HEI costs
An HEI has no rate, so its cost only shows up at settlement. What you owe depends on how much your home appreciates, the provider's multiplier, whether gain is measured from a discounted starting value, and whether a cap limits the provider's return. That's why the same HEI can cost 3.5% a year in a flat market and far more in a strong one.
When an HEI makes sense
- A monthly payment would strain your budget.
- Your income is irregular or hard to document, or your credit rules out a HELOC.
- You expect modest appreciation and have a clear plan to settle within the term.
When a HELOC wins
- You qualify at a reasonable rate and can handle the payment.
- You live in a fast-appreciating market, where giving up a share of your home's growth gets expensive.
- You want to keep all of your home's future value.
Questions
Is an HEI a loan?
No. There's no interest and no monthly payment. You're selling a share of your home's future value, which is why the cost depends on appreciation instead of a rate.
Can I have both an HEI and a HELOC?
Sometimes, but both are recorded against your home, and HEI providers limit total debt plus investment. Hometap, for example, requires you to keep at least 25% equity after funding, and Unlock 30%.
Which is easier to get with bad credit?
Usually an HEI. Several providers accept credit scores from 500 and don't test income, while HELOCs are underwritten on income and credit.
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