Home Equity Loan or Line of Credit

12 Replies

Hi - I am looking for an advice on whether or not choose Home Equity Loan or Line of Credit. 

I understand the basic difference between these two financing options. 
What I am trying to do is to borrow enough from either option to pay for 20% down payment for the first property I am trying to buy and have a second mortgage for the remaining 80% of the property. 

With that being said, will it be better to choose Equity Loan mainly due to fixed interest rate or line of credit which gives me the fund whenever I want within the threshold? 

Or am I not including other factors? 

Please share your insights! 

There are several more questions that just popped in my head for taking this decision:

  1. Are you planning to do other deals in the nearest future? 
  2. Is this loan going to be long-term or short-term? 
  3. Is your cash-flow allowing you to pay interest only, or principal and interest on your mortgage? 
  4. Is your second mortgage lender going to be OK that you are putting borrowed funds as a down payment or do you have the same amount or bigger in cash on your bank account?

@Harjeet Bhatti Thank you!. A question for you. What is the average interest rate for Home Equity? 

I understand that it differs my situations. Let's say you have about 80% equity in the primary residence and the amount of equity I am going to need is about 20% of the 80% equity I have. 

@Marina Draper . Thank you for your response. 

1. I am planning to buy a property within 60 days. 
2. Loan is going to be min 15 years and most likely 30 years. 
3. The cash-flow will allow me to pay interest + principal 
4. I am not sure if that is okay but I spoke to one of the agent and seems to have no problem with it. 

@Sungpil Lee Based on what you wrote, I would recommend you to go with whatever gives you the lowest rate, which will probably be a home equity loan. Plus, it is a fixed fee, so you are insured from the promised rates hiking up. 

Shop around and see which bank gives you the lowest rate, I would start with small local banks and Credit Unions. 

 @Sungpil Lee I'm considering that exact question myself. Just curious, what are some of the terms on the two different options that you have with the two options? I'd be interested to hear the interest rates you've been quoted on each option. 

I'm researching this for myself right now! I have a property on a five year note from a 401K loan and now we're gutting our personal home. I am trying to decide if I leave the investment property on the 401K loan or take one of the mentioned loans (HELOC or LOC) out on that property, and both pay off the 401K, and use the leftover cash for our rehab.

So far- same interest rate (super high seeming to me but I've only inquired at Wells Fargo due to him being a client of mine) and same origination fee. I believe 8 or 8.25% interest and $200 origination fee on each version. I need to find out the difference as there was another version of a HELOC that had closing fees of $3800.00 and I didn't want that one. I'd prefer the higher interest rate with a $200 set up fee than lower interest with a $3800 loan origination fee ect....

The only reason I'm leaning towards the personal line of credit is because I can pay back part of it quickly and not be paying interest on that part of the loan any longer.  

Like I said, I'm still researching it and will check with my local lender as well.   The 401K loan is 8.25% interest but we're paying back ourselves- not a bank and it's a 5 year loan not 20+.  

I'll let you know if I change my mind on the LOC.

@Sungpil Lee @Sarah Korsah  

1. Make sure you are clear on how the interest from a HE Loan (HEL) or HE Line of Credit (HELOC) used for investment properties is considered under the new tax law - it's not clear if still deductible or not.

2. If the amount available for both HEL and HELOC is the same, or the rates are not far from each other to be factor, I would go for the HELOC - for several reasons:

a. You'll pay interest on HELOC only when you have a balance. You can't use the money right now, you can wait for a good opportunity. With a HEL, you'll be charged and will have to pay monthly, regardless.

b. If you pay some balance on HELOC, the whole thing gets recalculated. HEL stays the same till you pay it down.

c. HELOC is reusable - if you pay down the balance, you can get more, and repeat. With a HEL, you can't get more than the initial one time full amount, and if you pay it down, can't ask for more - have to get a brand new HEL with all the associated costs.

d. With a HELOC you can put cash offers on investment properties, rehab them and/or place a tenant, and then appraise hopefully higher and refinance into a long term loan, rinse and repeat. I think the HEL will impact you differently in terms of financing - either will be considered in your DTI or it will be required to be paid off with the refi proceeds, in which case is one time deal.