Land Loan vs. Home Equity: Which Costs Less?

A dedicated land loan usually costs more upfront: a down payment of 25 to 40 percent, per Union Bank, and a rate roughly 1 to 1.5 points above a comparable home mortgage, according to MIDFLORIDA Credit Union. A home equity loan or HELOC often prices lower, but only because it’s secured by your house instead of the land.

What’s the Real Rate, Term, and Collateral Difference Between These Two Options?

The two loans differ on nearly every term that matters: what secures the debt, how much cash you need upfront, how the rate is set, and what a lender can take if you stop paying. Here’s how they compare side by side.

Federal banking regulators cap loans against raw, unimproved land at 65 percent of its appraised value under the Interagency Guidelines for Real Estate Lending Policies, compared with an 85 percent cap for financing a one- to four-family home, according to the FDIC’s real estate lending guidelines codified at 12 CFR Part 365. That 20-point gap in allowable leverage is the clearest single number explaining why land buyers put down so much more cash than home buyers.

Why Do Lenders Charge More for a Land Loan Than a Home Mortgage?

Lenders charge more for land loans because vacant land is worse collateral than a house from a risk-management standpoint, and the interagency lending guidelines cited above exist specifically to make banks hold a bigger equity cushion against that risk. A house generates no separate income either, but it’s easier to appraise, easier to insure, and easier to resell quickly if a lender has to foreclose.

Land loans generally carry interest rates 1 to 1.5 percentage points higher than a comparable home mortgage, according to MIDFLORIDA Credit Union, because undeveloped land is less liquid collateral and typically takes longer to sell if a lender ends up foreclosing on it. The same source notes that raw land without utilities or road access carries a bigger premium than a platted lot in a subdivision, since a buildable lot is a step closer to becoming a house a lender could more easily value and resell.

Does the Type of Land Change What You’ll Pay?

Yes, and federal lending guidelines actually build a graduated scale around exactly this distinction rather than treating all vacant land the same. Under the same interagency guidelines that cap raw land at 65 percent loan-to-value, land that’s already been through the process of subdivision, engineering, and permitting for development, sometimes called finished lots, can be financed up to 75 percent of value, according to the FDIC’s real estate lending guidelines. Multifamily construction sits at 80 percent, and a one- to four-family home under construction can go as high as 85 percent, which shows the ladder running from riskiest collateral to safest in fairly even steps.

Practically, that means a buyer financing a platted residential lot with utilities already stubbed to the property line should expect a smaller down payment and a lower rate than a buyer financing raw acreage with no road frontage, no survey, and no utilities anywhere nearby, even if the two parcels cost the same. A recreational or agricultural tract usually prices closer to the raw-land end of that scale unless it already has a well, septic system, and legal access in place. If you’re not sure which category your target parcel falls into, ask the lender directly which loan-to-value tier they’re quoting you and why, since that number is doing most of the work in setting your down payment.

How Much Cash Will You Actually Need Upfront?

A land loan generally demands more cash at closing than financing a home, and the exact amount depends heavily on the lender and what kind of land you’re buying. Down payments on land loans typically run 25 percent to 40 percent of the purchase price, according to Union Bank, well above what most home buyers put down on a mortgage.

Farm Credit institutions, which finance a large share of rural land purchases outside the conventional banking system, typically run terms of five to 30 years with a 20-year fixed rate as the most common structure, according to Farm Credit Services of America, and generally require a down payment in the same 25 to 40 percent range cited above. A HELOC or home equity loan works on a completely different math: instead of a down payment on a new purchase, you can generally borrow a percentage of your home’s appraised value minus what you still owe on your existing mortgage, according to the Consumer Financial Protection Bureau’s HELOC guide. How much land that buys you depends entirely on how much equity is already sitting in your house, not on the price of the parcel you want.

What Happens If You Can’t Keep Up With the Payments?

The two loans fail very differently, and that difference is the real cost most buyers underweight when they compare rates alone. A home equity loan and a HELOC are both secured by your existing house, not by the land you buy with the borrowed money, and the CFPB’s own consumer guide is direct about the consequence: if you fall behind or can’t repay the loan on schedule, you could lose your home, according to the CFPB’s HELOC guide.

A HELOC carries an added wrinkle: because it typically runs on a variable rate tied to an index like the prime rate plus a lender’s margin, a lender can freeze or reduce your available credit if your home’s value drops or your finances take a turn for the worse, per the same CFPB guide. Some HELOCs also convert to a lump-sum balloon payment at the end of a draw period, and if you can’t cover it by refinancing or otherwise, the same guide warns you could still lose your home over that shortfall. A dedicated land loan works differently: if you default on it, the lender’s remedy is limited to the land pledged as collateral for that specific loan, and your house is never part of the transaction. See closing costs for what else typically shows up at settlement on either type of loan.

Does Federal Law Give You a Right to Cancel Either Loan?

Only one of these two options comes with a federal cooling-off period, and it isn’t the one secured by the land. Federal law gives you until midnight of the third business day after signing to cancel a home equity loan or HELOC in writing, without penalty, and the lender must return any fees you already paid, according to the CFPB’s Regulation Z rule on the right of rescission. That protection exists because the loan is secured by your principal residence.

A stand-alone land loan carries no equivalent right, because Regulation Z’s rescission protection applies specifically to credit secured by the home you live in, not to a loan secured by vacant land you don’t occupy. If you’re financing raw acreage or a lot with a land loan rather than home equity, plan on the deal being final at closing, with no federally mandated window to change your mind afterward. That makes the due diligence period you negotiate into the purchase contract itself the only real chance to back out before you’re committed.

Which Option Actually Costs Less to Buy Land?

Neither option is cheaper in every case, because they’re not really pricing the same risk. A land loan’s higher rate and larger down payment reflect the lender’s exposure to collateral that’s harder to value and slower to resell, while a HELOC or home equity loan’s comparatively lower rate reflects that it’s backed by a house instead, which is a fundamentally safer asset for the lender, not a discount on the land itself. If your home carries enough equity to cover the purchase, a home equity loan or HELOC will often show a lower rate on paper and skip the land-specific down payment math entirely, but it also converts a land purchase you could otherwise walk away from into a debt secured by the roof over your head.

A dedicated land loan costs more in cash upfront and in rate, but it keeps that risk contained to the parcel itself, and it comes from a lender who already underwrites land specifically, rather than treating it as a side use of home equity. A HELOC or home equity loan can also be a slower process than it first appears once you account for the appraisal on your existing home, the disclosures a lender must send before opening the line, and the three-day cancellation window itself, all of which stack on top of whatever timeline the seller of the land is working with. A land loan, by contrast, closes on a schedule set entirely by the land transaction, since it isn’t tangled up with a second lien against a different property.

The most useful question isn’t which loan type is cheaper in the abstract, but which asset you’re actually willing to put at risk for this specific purchase. A buyer with substantial, low-cost equity already sitting in a paid-down house and strong confidence in their income may reasonably prefer the lower rate of a HELOC or home equity loan. A buyer who would rather keep a land purchase entirely separate from their home, even at a higher rate and a bigger down payment, has good reason to choose a dedicated land loan instead. For buyers weighing owner financing as a third path instead of either bank product, our look at how owner financing works in the Missouri Ozarks covers a very different, seller-driven structure with its own tradeoffs. Whichever route you take, our guide to buying land walks through the due diligence steps that matter regardless of how you finance the purchase.

If you already own a separate piece of vacant land free and clear, selling it outright is one more way to raise cash for a new purchase without touching your home equity or taking on a second loan at all. AMM Land Sales makes cash offers directly to landowners in all 50 states and contracts to purchase for its own account, closing through a licensed title company rather than a bank underwriting process, though any offer like that is worth comparing against your other options the same way you’d compare loan terms. You can see how that process works at our sell-land page if raising cash that way is on the table.