HELOC vs Home Equity Loan

17 Replies

If HELOC’s have a interest rate that adjusts/fluctuates/variable based on market conditions, why would anyone take out a HELOC compared to a regular home equity loan? A home equity loan has a fixed rate, so you don’t have to worry about it going up on you in the middle of your term with a big balance? Also, how is the home equity loan disbursed to a borrower? Like is it just deposited into a separate account you can draw from and place to checkings, or is it like an issued credit card? Thank you in advance.

Arthur Voskanyan

@Arthur Voskanyan

In these parts, a home equity loan is generally another term for home equity line of credit, but YMMV.

It sounds like you are comparing a fixed term, fixed rate loan - ostensibly secured by a mortgage - to a HELoC.

The are two different instruments which serve different purposes ... some of the differences are:

Mortgage secured financing:

  • entire amount being withdrawn is advanced at once and repayment is amortized over a specific period (typically 25yrs in Canada, 30yrs in the U.S.A. for residential financing).
  • the term of the loan may be the same as the amortization (common in the U.S.A.), or may be shorter (anywhere from 6-months to 10years in Canada).
  • the interest rate of the loan may be at a fixed for the entire term of the loan or may be variable.
  • there may be limits on prepayment of the loan (without penalty).

    

Home Equity Line of Credit:

  • The entire amount being withdrawn is not advanced upfront; funds can be withdrawn as needed.  [Note: there may be a time limit on the window during which funds can be withdrawn].  Repayment is not fixed, the borrower can repay at whatever rate best suits there needs {within any limitations set by the lender - typically required to pay interest and perhaps X amount of principal per year}
  • A HELoC is secured by the property as is the case with a mortgage;
  • Interest rate is variable and will typically be higher that paid with a mortgage secured loan (though not always);
  • There are generally no prepayment penalties.

   

@Roy N.
Thank you Roy, for the detailed specifics to my question. Let me ask, in terms of the amount that you will get; is the same right? If I qualify for $300,000 for a HELOC then the same amount is given for the secured home equity? And of course it’s based on your LTV and how usually the 85% of your property’s value. The point is; whatever amount I can take out for my HELOC will be the same if I go with a home equity fixed rate loan? Is this correct? The amount I qualify for won’t depend on whether I choose a HELOC or a Fixed home equity loan?

Thank you,

Arthur Voskanyan

@Arthur Voskanyan

The upper limit may be different. Here HELoC's are typically restricted to 65 - 70% LTV. There are lenders in Canada - and likely in the U.S.A. as well - who offer a hybrid of HELoC to 65% LTV and a mortgage secured note for an additional 15% to reach a total of 80%LTV.

The rule of thumb I use is:  If I absolutely need all (or most) of the capital in the short term, then go with a mortgage.  If I may or may not need a portion of the capital at some point in the future (say for a renovation), then go with the secured line of credit as I will not be paying interest until a withdrawal is made and then only on the amount withdrawn.

@Arthur Voskanyan I just got blasted with calls from a company called Homeside(apparently a large lender) that does 95%ltv helocs, rates they claim are in the 4% range. I'm not endorsing, because I have not used them. But I will be looking into it in the next few months. Wondering what the catch is, if there is one.

And yes, I think your math is right on your last post.

Originally posted by @Chris Connery :

@Arthur Voskanyan I just got blasted with calls from a company called Homeside(apparently a large lender) that does 95%ltv helocs, rates they claim are in the 4% range. I'm not endorsing, because I have not used them. But I will be looking into it in the next few months. Wondering what the catch is, if there is one.

And yes, I think your math is right on your last post.

Chris, I knew from your post that there would be something wrong with a (theoretical) 95% LTV HELoC. It took me less than a minute to find this link:- http://www.ripoffreport.com/reports/relevant/homes...

Have a good look at it! I certainly suggest: stay away from HomeSide (and similar hyped ads)!

Originally posted by @Brent Coombs :
Originally posted by @Chris Connery:

@Arthur Voskanyan I just got blasted with calls from a company called Homeside(apparently a large lender) that does 95%ltv helocs, rates they claim are in the 4% range. I'm not endorsing, because I have not used them. But I will be looking into it in the next few months. Wondering what the catch is, if there is one.

And yes, I think your math is right on your last post.

Chris, I knew from your post that there would be something wrong with a (theoretical) 95% LTV HELoC. It took me less than a minute to find this link:- http://www.ripoffreport.com/reports/relevant/homes...

Have a good look at it! I certainly suggest: stay away from HomeSide (and similar hyped ads)!

Local Credit Unions could leverage you out to 100%. Of course, your APR on this will be tremendously more than the standard 80-85% LTV. That's the catch.

I believe the answer you are searching for is that a HELOC is a lower costs to obtain the loan generally. The HELOC may be useful for temporary financing like an acquisition and rehab then you would want to pay down or off with permanent financing that would be fixed or at least fixed for a certain period of time. Hope that helps!

Originally posted by @Arthur Voskanyan :

If HELOC's have a interest rate that adjusts/fluctuates/variable based on market conditions, why would anyone take out a HELOC compared to a regular home equity loan? A home equity loan has a fixed rate, so you don't have to worry about it going up on you in the middle of your term with a big balance? Also, how is the home equity loan disbursed to a borrower? Like is it just deposited into a separate account you can draw from and place to checkings, or is it like an issued credit card? Thank you in advance.

Arthur Voskanyan

HELOC - you only pay for what you use. If I only need 30K to seal a deal, then my interest is based on 30K/

Loan - I pay interest on the entire amount if I use it or not. 

Originally posted by @Arthur Voskanyan :

yes, 95% is much better. But I wonder what is the average lenders give on equity? I heard 90%+ is tough to get. And 80% is more common

I have a 90% LTV HELOC on my primary residence. Need to find the right lender.

Originally posted by @Arthur Voskanyan :

Roy,

If I own a house worth $400,000 and it's paid off free and clear, based on 65% LTV, a lender will loan give me $260,000 max loan amount???

Thank you,

I am in a similar situation. I have a paid off home that is worth more than $400K, bank appraised. They gave me a $200K HELOC, so it was under 50%. Originally they told me 65% LTV, until they appraised the value and then told me they capped the loan product at $200K. I would shop more than one bank to see what they can do.

The HELOC is nice because it currently has $0 balance so I don't pay a dime. I can keep the line of credit open for 7 years with no activity. My strategy is to use it to make cash offers, then refinance the property into a long term fixed rate loan. Pay off the HELOC, then do it again. Rate is variable but it is short term lending so no big deal. Only .5% over prime so not horrible.

Arthur,

You most likely need to reach out to a HELOC lender (Banks and Credit Unions are good) in California and conventional lender (Broker) in California if that is where the property is located. Each state will have their own regulations that dictate the Max LTV you can have on a HELOC and Cash Out. In Texas that max is 80% on a primary. In Texas a HELOC is only available on primary properties and a max LTV of 75% on a cash out of investment property. Best of Luck

I'd be more in favor of the HELOC. If you look around you can find both fixed rate and variable on them. The other advantage is you only pay interest on what you use, not the full amount.

I'm in the middle of refinancing my HELOC going from variable rate to fixed at 6% with 90% LTV. From what I recall of the conversation I had with them, it'd be about 1% lower if I went 80% LTV... and a bit lower if I wanted a variable rate.

Most have 10 years where you can draw from it, then the final 10 to pay it down, or refinance it. 

I see it more as a way to be a bit more agile, being able to pay cash for a property, then refinance it, or one of the others later to pay down the HELOC and repeat.

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