Can you use a home equity loan for investments?

Couple looking over the updates on their home equity investment.

Getting by on your income alone can be challenging. If you’re looking for a way to make extra money, you may be thinking about investing in some property or stocks.

The good news is that if you’re a qualified homeowner, you might be able to get some investment money with a home equity loan.

By the end of this post, you’ll be able to make an informed decision about whether using a home equity loan for investments is right for you!

The essentials: Using a home equity loan for investments

Some homeowners can put their home equity toward an investment.
Tapping into your equity is possible with a home equity loan, home equity line of credit (HELOC), and cash out refinance.
You can use your equity to finance investments, including using home equity toward an investment property, stocks, bonds, or mutual funds.

How to use home equity on other investments

When you have equity in your home, your property is worth more than the amount you still owe on your mortgage. You can use this equity to make other investments that can generate income or appreciate over time.

The important thing to remember is that you are essentially using your home as collateral for these other investments. If the investment fails, you could lose your home. Carefully consider any investment you plan to finance with home equity.

However, when used wisely, home equity can be a powerful tool for growing your wealth.

Potential investment options

You can tap into your home equity in various ways, from taking out a loan to investing in stocks and bonds. With so many options available, it’s essential to understand the differences.

There are a few options when it comes to home equity investments:

Real estate: Using home equity to buy an investment property can be a great way to build wealth. By tapping into your home equity, you might be able to purchase additional real estate properties that generate rental income or appreciate over time. You can also use your home equity to finance improvements on existing properties or start a real estate development project. Just be sure to research any real estate investment thoroughly before committing your money, as there are many risks associated with this type of investment.
Stocks and bonds: When you invest in stocks, you own a piece of a company traded on an exchange. When you buy stocks, you gain exposure to potential capital appreciation and dividends. Bonds are debt instruments issued by companies or governments that pay interest over time. While they may not offer as much potential return as stocks, they tend to be less risky than other investments.
Mutual funds: Mutual funds are another great way to diversify your portfolio and potentially increase your returns with minimal risk. Mutual funds are professionally managed portfolios comprised of stocks, bonds, and other assets that allow investors to spread their risk across multiple investments. With a mutual fund, you take advantage of skilled management services and diversification benefits that individual stocks cannot provide. These funds are typically sold through financial advisors and have associated fees, so read a fund’s prospectus carefully before investing money in it.

How does a home equity loan work?

Many homeowners use their home equity to secure funds for investments of all types. There are a few different ways to do this, such as home equity loans, home equity lines of credit (HELOCs), and cash out refinances. 

Here’s how each works and why they might be right for you:

Home equity loan 

A home equity loan is a type of loan that involves borrowing money against the value of your home. The lender lets you borrow money based on the amount of equity you have in your property. 

Your home equity is determined by subtracting the amount owed on your mortgage from the current market value of your property. So, if your home is worth $500,000 and you owe $300,000 on your mortgage, then you have $200,000 in equity.

It’s important to note that with a home equity loan, you receive the entire loan amount upfront and repay it over time with fixed monthly payments.

Discover® Home Loans offers low fixed rates on home equity loans between $35,000 - $300,000 and $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.

Home equity line of credit (HELOC) 

A HELOC is like a home equity loan but works more like a credit card with an approved line of credit. With this type of loan, instead of receiving one lump sum payment right away as you would with a home equity loan, you can draw down funds as needed up to an established maximum limit and pay back what you used plus interest.

A HELOC may be ideal for those who need access to funds over time or have ongoing expenses they need help financing.

Cash out refinance 

A cash out refinance differs from the other two because it involves refinancing your existing mortgage instead of taking out additional debt secured against your property’s value. 

With a refinance, you can take out more cash than what you owe on your current mortgage balance. You can then use the extra funds for your investment opportunities.

If you want to learn how much cash you may be able to get out of your home, you can use the cash out refinance calculator from Discover Home Loans.

Using home equity for investments FAQs

Home equity is a helpful tool to leverage your assets to increase your financial investments. With that said, there are some critical factors to consider when deciding between home equity loans.

Let’s explore the answers to some frequently asked questions about using home equity as an investment strategy:

Which is better, HELOC or home equity loan? 

The answer to this question depends on your financial goals and objectives. A HELOC is best if you want short-term access to funds that you can borrow against as needed, while a home equity loan is better if you want a lump sum of cash up front that comes with consistent fixed monthly payments. A HELOC also gives you more control over how much money you borrow at any given time, while a home equity loan has fixed terms and conditions you must follow. 

Ultimately, it’s up to you to decide which option works best for your needs.

Can I get a stated income HELOC? 

Yes. Homeowners with stated income can typically qualify for both a HELOC and a home equity loan. The process likely requires more paperwork than traditional loan applications since lenders need to verify that your stated income is accurate and reliable before approving your loan or line of credit. Additionally, you may have to provide additional documentation, including tax returns or bank statements, that prove the validity of your stated income level.

Can I use a HELOC to pay off an investment property? 

Yes, it’s possible to use funds from either a HELOC or a home equity loan to pay off an investment property purchase. However, it’s important to understand the risks associated with these types of loans before taking them out — especially if used for real estate.

Depending on market conditions and other factors, there’s always the potential that the value of the investment property could drop below what was borrowed against it — leaving homeowners responsible for paying back any remaining balance regardless of its current market value.

Get started on your home equity loan for investments

A home equity loan can be a great way to finance investments in other ventures, like real estate, stocks and bonds, or mutual funds.

However, doing your research before committing to one of these products is essential. Make sure you understand how they work and shop for rates and products to get the best deal.

Please note: Discover Home Loans offers home equity loans and mortgage refinance opportunities, but does not offer HELOCs.

Discover does not sell non-deposit investment products (“NDIP”) or provide recommendations regarding NDIP. NDIP are NOT FDIC insured. This article is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.