HEI vs. HELOC: Which Is Better?

If you have a significant amount of equity in your home, it’s possible to leverage that money to improve your financial situation or lifestyle.

A home equity investment (HEI)—also commonly referred to as a home equity sharing agreement (HESA) or a home equity agreement (HEA)—is a contract between a homeowner and an investment company. A HELOC is a type of revolving credit similar to a credit card which uses your home as collateral.

HEIs and HELOCs both offer the potential to access cash and help you pay off high-interest debt, fund home improvement projects, pay for college, and more. 

Despite both leveraging your home equity, these two options work very differently. Comparing a HEI vs. a HELOC can help you determine which one is better for you. Here’s what you need to know.

In this guide:

• What is a home equity line of credit (HELOC)? 
• What is a home equity investment (HEI)?
• HELOC vs. HEI
• How to decide between a HELOC and HEI
• Long-term effects of HEIs vs. HELOCs
• FAQ

What is a home equity line of credit (HELOC)? 

A HELOC is a type of revolving credit similar to a credit card. You can borrow as much or little as you want up to the account’s credit limit, which is determined by the amount of equity you have and your creditworthiness. You can borrow up to the lender’s maximum combined loan-to-value ratio (CLTV)—often 80% to 85%. This means your primary mortgage loan and HELOC balances don’t exceed 80% to 85% of your home’s value. Some lenders may be willing to go higher than 85%.

You can draw from a HELOC as often as you’d like during its draw period, which typically lasts five to 10 years. You can also pay down the balance, allowing you to draw more money in the future, but many HELOCs only require you to pay accrued interest during the draw period. You can use HELOC funds for just about any purpose you want.

After the draw period ends, you’ll enter a repayment period, which can last up to 20 years. During that time, you’ll pay off the remaining balance, which includes full principal-and-interest monthly payments.

You may consider a HELOC if you want ongoing access to credit instead of a lump sum upfront or if you like the idea of repaying what you borrow over as long as 30 years, with low payments during your draw period.

Pros and cons of HELOCs

Pros

• You only pay interest on what you borrow

  You can borrow up to your credit limit, but you only have to pay interest on the amount you draw. 

• Potential tax benefits

  If you use HELOC funds to “buy, build, or substantially improve” the home you used as collateral for the loan, you may be able to deduct some or all of your interest on your tax return.

• Can be inexpensive

  Compared to personal loans and credit cards, HELOCs can offer lower interest rates. Compared to an HEI, you also don’t have to worry about how your home’s value affects your costs—more on that below.

Cons

• Interest rates are variable

  Certain HELOC providers allow you to convert some or all of your balance to a fixed-rate loan, but most HELOCs come with variable rates that can fluctuate with the market. When interest rates are low, that can be advantageous. But if rates are high, it could cost you more.

• LTV limits

  If you don’t have much equity in your home, you may not qualify for a HELOC. Even if you do, you may not be able to borrow enough to meet your needs.

• Requires decent credit

  The minimum credit score required to get approved for a HELOC is 620, but many lenders prefer 700 or higher. Even if you meet the minimum requirements, you may not get favorable terms without a near-perfect credit history.

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Tip

Erin Kinkade, CFP®, offers advice for those considering the tax benefits of a HELOC: “This only applies if it’s more favorable for the borrower to itemize their deductions versus claiming the standard deduction.”

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What is a home equity investment (HEI)?

A home equity investment—aka home equity sharing agreement (HESA) or home equity agreement (HEA) is a contract between a homeowner and an investment company. If you qualify, the investment company will pay you a lump sum in exchange for a share of your home’s future value—often 15% to 20%, depending on when you settle. 

No monthly payments or interest rates are involved, and if you qualify, you may be able to borrow 10% to 30% of your home’s current value. However, most home equity investment companies will adjust your home’s appraised value down. This risk adjustment could be 2.5% to 29% of your home’s market value. Companies do this to protect themselves against the possibility of the home depreciating in value.

You’ll have up to 30 years to settle the investment, which you can do when you sell the home. If you don’t want to sell, you can buy out the investment company using your savings, a cash-out refinance loan, a home equity loan, or a HELOC. 

How does a HEI work?

An HEI can have a high price tag, especially if your home’s value skyrockets. You may pay more than double the amount you borrowed. 

For example, let’s say your home is worth $500,000, and you qualify for a $50,000 investment in exchange for 20% of your home’s future value. If your home sells for $550,000 five years later, you’ll have to pay $110,000. 

They can be expensive, but HEIs tend to have less stringent approval requirements, making them more appealing to borrowers with low incomes or less-than-stellar credit scores.

Pros and cons of HEIs

Pros

• Lower requirements

  There’s no income requirement when you apply for an HEI, and investment companies may accept credit scores as low as 500.

• No payments or interest charges

  An HEI isn’t a loan, so you don’t have to worry about fitting a monthly payment into your budget or calculating interest charges. 

• Depreciation can work in your favor

  If your home loses value, you and the investment company will share in that loss, reducing how much you have to pay.

Cons

• Can be expensive

  If your home’s value skyrockets, you may end up paying far more than you would with a HELOC or home equity loan. If you sell the home, this could leave you with insufficient money for a down payment on your new home.

• You may be forced to sell your home

  If you reach the end of your term and can’t afford to buy out the investment or get approved for a refinance or second mortgage to pay it off, you’ll need to sell your home to satisfy the obligation.  

• May not be available everywhere

  Unlike HELOCs, many home equity investments aren’t available nationwide—some investment companies operate in fewer than 20 states. Depending on where you live, you may not even have the option to use the HEI. Even if you do, your mortgage lender may not allow it. 

HELOC vs. HEI

We’ve summed up the significant differences between the two in the table below:

Detail	HELOC	HEI
Interest rates	8.5% – 18% variable*	None
Repayment terms	Draw period of up to 10 years, then a repayment period of up to 20 years	Up to 30 years, paid in a lump sum
Loan amount	Up to a combined LTV (often 85%)	10% to 30% of your current adjusted home value
Minimum credit score	620	500
Maximum debt-to-income ratio	43%	None
Monthly payments	Interest-only during the draw period; principal and interest during the repayment period	None

*As of October 2023

How to decide between a HELOC and HEI

If you’re unsure about how to choose between a HELOC and an HEI, it’s important to consider your financial situation, particularly your income and credit history, your needs, and the potential costs.

Here are situations where it may make sense to pick one over the other.  

If you…	HELOC or HEI?
Have a solid credit history	HELOC
Have fair or poor credit	HEI
Want access to a revolving credit line	HELOC
Want a lump-sum payment	HEI (or home equity loan)
Want to avoid tying your payment to your home value	HELOC
Don’t mind the possibility of paying more in the long run	HEI

As you consider your situation and needs, research lenders and investment companies that offer HELOCs and HEIs to get a better idea of what your options would look like and how much they might cost. 

You may also consider other ways to accomplish your goal, especially if you have great credit and can qualify for financing options that don’t involve your home’s equity.

Long-term effects of HEIs vs. HELOCs

Both HEIs and HELOCs can have a significant impact on your finances in the long run.

If your home’s value surges, you might end up paying much more than you borrowed with an HEI because the company shares in a percentage of your home value.

Calculating the long-term impact of a HELOC can be more difficult because it depends on how much you borrow and your interest rate, which is often variable. HELOCs can get expensive if interest rates increase during your draw period or repayment period. 

But depending on your budget, recurring monthly payments could make it difficult to work toward other important financial goals. 

FAQ

Can I switch from a HELOC to an HEI, or vice versa?

It’s possible to use a HELOC to buy out an HEI, and if you already have a HELOC on your home, you may be able to qualify for an HEI to pay it off as long as you meet all the requirements.

What happens if my home loses value and I have an HEI or HELOC?

With an HEI, your payment is based on your home’s future value, which means if your home price goes down, you won’t have to pay as much. With a HELOC, your lender could freeze your credit line or reduce your credit limit to account for the depreciated value.

How does either option affect my credit score?

In both cases, the lender or investment company will run a credit check when you apply, which can cause your credit score to dip by a few points.

Beyond the initial inquiry, an HEI won’t impact your credit at all because it isn’t a loan and won’t show up on your credit report. 

In contrast, a HELOC will show up on your credit report, and if you maintain a low credit utilization rate—the percentage of your credit limit you use—and pay on time, it could help you improve your credit. At the same time, racking up a high balance or missing a payment could damage your credit.

Are there any restrictions on how I can use the funds from an HEI or HELOC?

Generally, no. You can use your funds for anything you want. If you decide to use your HELOC to “buy, build, or substantially improve” your home, you may even qualify for a tax break on the interest you pay if you choose to itemize your deductions on your tax return.

How does the economic environment affect HELOC and HEI rates and terms?

HEIs don’t charge interest, instead basing your repayment on your home’s future value. As a result, your terms are based on the investment company’s projection of how much your home will appreciate and when you might settle the investment.

HELOCs, on the other hand, charge variable interest rates on the amount you borrow, which can fluctuate based on broader economic conditions. In particular, HELOC interest rates are influenced by the federal funds rate, which is what banks charge when lending to each other to meet overnight reserve requirements.

During times of high inflation rates, the Federal Reserve hikes the federal funds rate to increase the cost of borrowing, which can reduce consumer spending and bring the inflation rate down. When inflation is down, interest rates tend to decrease, making it more affordable to borrow. In turn, consumer spending increases.