The Quick Read: The cost of a home equity loan has three parts: fees on the new money only, a higher price on that second balance, and a second payment stacked on top of your first mortgage. Which one wins depends on how big your cash need is, how your current first mortgage compares with today’s market, and how long you will hold the new debt. On a rental, the network Lendmire works with caps equity lines at 70% combined leverage, so the comparison often ends at a DSCR cash-out refinance.
- A refinance applies its fees to the whole new balance, so a small cash draw can look expensive.
- An equity line applies fees to the new money only, but its pricing floats and never converts to fixed.
- A small cash need paired with a cheap first mortgage favors the equity line. A large cash need favors the refinance.
- Investment-property equity lines top out at 70% CLTV, need a 700 credit profile, and cap at a $500,000 line.
- Real cost means fees, the rate change on the full balance, any prepayment penalty, and any second payment. The fee percentage alone misleads.
Key Terms Defined
Home equity loan: A second mortgage that sits behind your existing first mortgage and gives you cash against the equity you have built.
Home equity line: A revolving version of the same idea, where you draw cash as needed. The investment-property line Lendmire arranges through its wholesale network works this way.
Cash-out refinance: A new first mortgage that pays off the old one and hands you the difference in cash.
CLTV (combined loan-to-value): All loans against the property added together, divided by its value.
Second lien: A loan that gets paid after the first mortgage if the property is sold or foreclosed.
DSCR (debt service coverage ratio): Monthly rent divided by the full monthly property payment. A DSCR loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines.
PITIA: Principal, interest, taxes, insurance, and association dues. It is the full payment the rent has to cover.
Seasoning: The waiting period a lender wants between buying a property and borrowing against it.
Prepayment penalty: A fee for paying off a loan early, usually within the first few years.
How large a line the equity supports.
An equity line is sized by combined loan-to-value, occupancy, and credit — not by rental coverage. Switch the occupancy or the credit band and the ceiling moves with it.
Investment-property lines require a 700 minimum credit score; second-home lines start at a 640 minimum and primary-residence lines at 600, and the combined-LTV ceiling steps down as the credit band drops on primary-residence and second-home lines and holds on investment-property lines; the line cap steps down on primary-residence lines and holds at every tier on investment-property and second-home lines.
A debt-to-income ratio above 45% requires 680+ credit. Profiles under 640 are limited to single-family homes. At least 75% of the approved line is drawn at closing. Ceilings, floors, and caps update from Lendmire’s centralized guideline source.
Line estimate
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. The rate is an editable assumption; equity-line pricing is variable through both the draw and repayment periods and never converts to fixed. Occupancy and credit drive the ceiling together: an investment property tops out at 70% combined LTV (minimum credit 700, line cap $500,000); a second home tops out at 90% combined LTV (minimum credit 640, line cap $500,000), with the ceiling stepping down as the credit band drops (the cap holds at every tier); a primary residence tops out at 90% combined LTV (minimum credit 600), and its $750,000 maximum line is available only at 75% combined LTV or below with a 700-or-better credit profile (720 on the longer-runway program) and a full appraisal. Lines above $500,000 require a full appraisal. Credit, debt-to-income, property type, and full underwriting review all affect the final line.
What Does a Home Equity Loan Actually Cost?
The cost comes in three layers: up-front fees, the price of the money over time, and the effect on the loan you already have. Most borrowers only look at the first layer. The investors who compare well look at all three.
Up-front fees are the familiar list: appraisal, origination, title work, recording, and attorney fees where required. Third-party items such as the appraisal and recording are mostly fixed. Origination is the piece that varies by lender.
Consumer-finance editorial sources give rough ranges for these fees. Bills.com reports that cash-out closing costs often run 2% to 6% of the new loan amount. Zillow Learn puts a cash-out refinance at 2–6% and a home equity loan at 2–5% of the loan amount. Those are market-wide figures for owner-occupied borrowers, and Zillow’s page is older. Treat them as a starting shape, not a quote. Fees on a rental file vary by lender, loan size, and structure.
The second layer is the price of the money. An equity loan is a second lien, which is riskier for the lender, so its pricing is usually higher than a first mortgage’s. That higher price applies only to the smaller second balance.
The third layer is what happens to your existing first mortgage. A refinance replaces it. An equity loan leaves it alone and adds a second payment beside it.
Why the Fee Base Matters More Than the Percentage
Refinance fees are charged on the entire new loan, not just the cash you take out. That one fact explains most of the surprises.
Run a modeled example. Assume a flat 3% in refinance fees, a mid-range figure inside the market band above. Say your existing first mortgage is four times the cash you want. The new loan is five times the cash, so fees equal 15% of the cash you walk away with. Now say the first mortgage is nine times the cash. The new loan is ten times the cash, and fees equal 30% of the cash you receive.
These are modeled assumptions, not quotes. They show the pattern. The smaller the cash draw relative to your balance, the more a refinance costs per dollar you actually receive.
An equity line charges its fees only on the new money. That is why Zillow’s small-balance scenario favors the second lien when the cash need is modest and the first mortgage is cheap. Keeping a low first mortgage intact has real value on its own.
The reverse also holds. When the cash need is large relative to the balance, the refinance fee base stops being a penalty. The first mortgage gets replaced anyway, and one loan can be simpler than two.
Side by Side on an Investment Property
Here is how the two paths compare on a rental. The equity line column reflects the investment-property line available through Lendmire’s wholesale partners. The cash-out column reflects typical DSCR programs across the network, subject to lender guidelines.
| Factor | Investment Equity Line | DSCR Cash-Out Refinance |
|---|---|---|
| Lien position | First or second lien | New first mortgage |
| Fee base | New line amount only | Full new balance |
| Max leverage | 70% CLTV (investment property) | 75% LTV (standard rental cash-out) |
| Size range | Up to $500,000 line | Up to $3,000,000 on standard programs |
| Pricing | Floats; never converts to fixed | 30-year fixed is the spine |
| Reviewed on | Personal credit and DTI | Rent against PITIA |
| Title | Individual or revocable trust | Entity vesting generally accommodated |
The 75% figure applies to cash-out on standard rentals. Cash-out on a short-term rental typically tops out at 70% LTV. Availability and terms are subject to lender guidelines.
How Underwriting Treats Each Path
Underwriting is where the two products stop looking alike. Here is the sequence on each side.
1. Equity test. A cash-out sets a single new first-lien LTV. An equity line stacks a second lien under a CLTV ceiling. On an investment property, the line’s ceiling is 70% CLTV with no higher tier.
2. Fee base. A refinance prices fees on the full new balance. The line prices them on the new money only.
3. Effect on your old loan. The refinance resets the rate on the whole balance. The line keeps your first mortgage as it is and adds a second payment.
4. Who gets tested. The equity line tests you. The investment line needs a 700 credit profile at minimum, and the maximum DTI is 50%. It is qualified on the interest-only payment calculated on the maximum draw. A DSCR cash-out tests the property: rent against the full PITIA.
5. Valuation and paperwork. Lines at or below $500,000 ordinarily run an automated valuation. A DSCR cash-out typically uses a full appraisal with a rent schedule. Expect a lease or rent roll, entity papers if any, a payoff statement, and bank statements showing reserves.
One feature of the line deserves attention. At least 75% of the line is drawn at closing. The usual argument for a line is that you borrow only what you use. Here, most of the money is borrowed on day one, and you pay on it through a five-year interest-only draw and a 25-year repayment period.
On the DSCR side, 1.00 is where many select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Stronger coverage opens better pricing and leverage. Credit floors vary: 620 exists in parts of the network, most programs want about 660, and 700 and above unlocks the strongest leverage tiers. About six months of seasoning is the common expectation on a cash-out.
Reserves vary by lender, leverage, loan size, and transaction type. About six months of PITIA is common. Conservative rate-term files at modest leverage under $1,500,000 can see reserves waived, and loans above that size typically step up to about nine months.
Clearing 1.00 does not mean the property cash flows. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital expenses sit outside the ratio.
For a deeper walkthrough of how programs are built, see Lendmire’s complete DSCR loans guide.
The Costs That Hide on the DSCR Side
A cash-out refinance on a DSCR loan has its own hidden items. None of them show up in the closing-cost percentage.
Prepayment penalty. Many DSCR loans carry one. A step-down schedule is the common shape, where the penalty shrinks each year of the loan. Some loans carry a flat schedule or a short interest-based penalty. No-penalty loans exist, but they usually trade the flexibility for higher pricing or a larger origination fee.
Zero-out-of-pocket offers. These are paid for one of two ways: a lender credit funded by higher pricing, or costs rolled into the loan amount. Either way the cost exists. It shows up in the payment or the balance instead of at the table.
Penalty on the existing loan. If you are replacing a DSCR loan, the old loan’s prepayment penalty can be triggered by the refinance. The new loan then restarts its own clock, so a second refinance can be expensive.
Net proceeds. Cash-out proceeds are what remains after the payoff, closing costs, and any penalty. They depend on the file. Lendmire’s piece How Much Cash an Investor Cash-Out Refinance Releases After Costs walks through that subtraction.
Where the General Rule Breaks
The simple rule says equity loans cost less in fees and refinances cost less in rate. Several situations break it.
A small draw against a cheap first mortgage. This is the case where the line wins. You avoid fees on the full balance and keep your existing first mortgage in place.
A rental held in an LLC. This one ends the comparison early. LLCs, corporations, partnerships, and irrevocable, blind, or land trusts cannot hold title on the equity line. Only an individual borrower or a revocable living trust can. A property already deeded to an LLC needs a vesting change or a DSCR cash-out. DSCR cash-out generally accommodates entity vesting, subject to lender program eligibility.
A thin lender pool. NerdWallet notes that equity loans and lines on investment properties are not widely available. Lenders are fewer, limits are lower, and requirements are stricter, because rentals are viewed as a higher default risk. Cost comparisons written for owner-occupants only transfer loosely. Availability narrows further here: the equity lines are offered in Lendmire’s 16 full-service states, a narrower footprint than the 41-market DSCR platform.
A recent purchase. Seasoning applies to cash-out. If you bought recently, a cash-out may not be available yet. The line may or may not be an option depending on credit, CLTV, and property type.
A crowded personal debt picture. An equity line adds to your personal debts, and DTI is tested. A borrower is limited to three lines, and an investor with more than 15 financed properties is not eligible. DSCR files are reviewed property by property instead.
Ineligible property types. The equity line does not cover manufactured homes, co-ops, condotels, log homes, commercial, mixed-use, or agricultural zoning. On the DSCR side, manufactured homes (single- and double-wide), log homes, and barndominiums are not offered in the network.
No-closing-cost offers. The CFPB’s HELOC booklet says some lenders waive some or all up-front costs on a line, and that cash-out refinance closing costs are generally higher. A waiver is a pricing decision, so compare it against the same loan with costs paid.
Decision Rules for Investors
These if/then rules are built from the mechanics above.
- If the cash need is small and your first mortgage is cheap, price the equity line first. Replacing the whole balance to reach a small amount is hard to justify.
- If the cash need is large relative to your balance, the refinance fee base matters less. The DSCR cash-out usually wins because it supports a larger amount.
- If you need more than a $500,000 line, the investment equity line is out. A DSCR cash-out supports loan sizes up to $3,000,000, subject to program terms.
- If the property sits in an LLC, go straight to a DSCR cash-out unless you plan to retitle it.
- If you plan to refinance again soon, weigh the prepayment penalty first. It can make a second refinance costly.
- If rent barely clears the payment, remember that coverage and cash flow are different things. Size reserves for repairs and vacancy yourself.
When you collect quotes, ask for these items in writing so the offers compare like for like:
- The fee base and every fee line, third-party and lender.
- The prepayment penalty structure, if any.
- Whether costs are paid up front, rolled in, or covered through pricing.
- The leverage the quote assumes, with the occupancy and transaction type named.
- Whether the quote is for a line or a fixed second lien.
- The reserves the lender expects.
For how the equity itself is measured, see Lendmire’s piece How Much Equity a Cash-Out Refinance Releases Toward the Next Rental.
Risks and Tax Basics
Both products put your property up as collateral. Falling behind on either one puts the property at risk. A second lien adds a payment. A refinance can lengthen your debt.
Tax treatment can depend on how the funds are used and how the property is held; investors should keep clear records and speak with a qualified tax professional before relying on any deduction.
Frequently Asked Questions
Is a home equity loan cheaper than a cash-out refinance on a rental?
It depends on the size of the draw. Up-front fees are usually lower because they apply only to the new money, and that wins on a small draw against a cheap first mortgage. The second balance usually carries a higher price, and rentals have fewer lender options. Compare total cost, not the fee percentage.
Can I get an equity line on a rental held in an LLC?
Not through the equity lines in Lendmire’s network. Title must be held by an individual borrower or a revocable living trust. A property already in an LLC needs a vesting change or a DSCR cash-out instead.
Does a DSCR cash-out have a prepayment penalty?
Often, yes. A step-down schedule is the most common shape. No-penalty versions exist but usually cost more in pricing or fees. Ask for the schedule in writing before you compare offers.
How much can I borrow against an investment property with each option?
An investment-property equity line goes up to 70% CLTV with a 700 minimum credit profile and a maximum line of $500,000. A DSCR cash-out refinance on a standard rental tops out near 75% LTV across most of the network. On a short-term rental, cash-out is typically 70% LTV. All figures are subject to lender guidelines and full file review.
Does clearing 1.00 coverage mean my rental has positive cash flow?
No. The coverage ratio compares rent to the full payment only. Repairs, vacancy, management, utilities, and capital expenses are outside it. A property can clear the ratio and still leave you short in a bad month.
Next Step
If you are weighing a home equity line against a cash-out refinance and want to see how the numbers work, Lendmire can help you compare HELOC options based on the property, the equity available, credit profile, combined leverage, and your goals. Lendmire is a mortgage broker that arranges financing through select lenders in its wholesale network. It does not make the lending decision, and every file is reviewed individually.
For the mechanics of pulling equity out of a rental property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and real estate investors in its 16 full-service states. Home equity lines of credit are arranged through wholesale lending channels; Lendmire brokers the line and the lender underwrites each application under its occupancy-based guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Bills.com — Home Equity Loan vs. Cash-Out Refinance
2. Zillow Learn — Refinance vs. Home Equity Loan
3. NerdWallet — Can You Get a HELOC on an Investment Property?
This article is part of Lendmire’s home equity line of credit program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Should You Use a HELOC on a Paid-Off Home to Buy a Rental? · Is a HELOC a Bad Idea If You’re Near Retirement or on a Fixed Income? · Can You Keep a HELOC in Second Position Through a Refinance?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.