Both HELOCs and home equity loans let real estate investors leverage existing equity to fund new acquisitions, down payments, or renovation costs. The products share the same collateral, but their rate structures, disbursement mechanics, and repayment terms create meaningfully different risk profiles depending on how you plan to use the capital.
How a HELOC Works
A Home Equity Line of Credit (HELOC) is a revolving credit facility secured by your primary residence or an investment property. Lenders typically allow you to borrow up to 80-85% combined loan-to-value (CLTV), meaning your first mortgage balance plus the HELOC balance cannot exceed that percentage of the property's appraised value.
HELOCs operate in two phases. During the draw period, commonly 5-10 years, you access funds as needed and often make interest-only payments. After the draw period ends, the line closes and you repay the outstanding balance over a repayment period of 10-20 years, with both principal and interest due each month.
Rate structure: Most HELOCs carry a variable rate tied to the prime rate plus a margin, typically prime + 0% to prime + 2% for well-qualified borrowers. When the Federal Reserve raises rates, your HELOC payment increases accordingly.
Practical strengths for investors:
- Pay interest only on the amount drawn, not the full credit line
- Reuse the line repeatedly as you pay it down during the draw period
- Useful when acquisition costs are uncertain upfront (inspections, repairs, staging)
Practical weaknesses:
- Variable rate exposure can compress returns if rates rise sharply
- Lenders can freeze or reduce lines during market downturns, a documented pattern from 2008-2009
- Harder to obtain against investment properties; most lenders restrict HELOCs to primary residences or owner-occupied properties
How a Home Equity Loan Works
A home equity loan, sometimes called a second mortgage, delivers a single lump-sum disbursement at closing with a fixed interest rate and a fixed monthly payment over the loan term, typically 5-20 years. The CLTV limits are similar to HELOCs, generally 80-85%, though some lenders will go to 90% for primary residences with strong credit profiles.
Rates on home equity loans run slightly higher than comparable HELOCs at origination, but they do not change over the loan term. As of mid-2025, rates on home equity loans for primary residences generally range from the high 7% to low 9% range depending on credit score, CLTV, and lender, though individual quotes vary and borrowers should obtain current offers from multiple lenders.
