home equity loan or equity line of credit

10 Replies

I have about 60k equity that I can pull out to put down on a buy and hold rental..need advise on which option would be better to use..fixed equity loan or equity line of credit..thanks

What are the terms?  Payback period, interest rates?

the fixed term is around 6 1/2 % fixed for 20 years. The line of credit is variable but at 4/12 %, for 10 years paid in full at 15 years. I just like the fact the line of credit is interest only with a lower payment and it will cover the rent creating positive cash flow...

@Brian Sachs  ...it will create positive cash flow for how long, then you get the balloon.  What's your plan for when that happens?  Neither one of these loans are the Carrying kind.

6/5% for 20 years is a commercial loan.

You say you have 60K in equity, but that might get you very little in terms of financing, regardless of loan or line of credit. There is something called CLTV (Combined Loan to Value) that is used to determine how much the equity will get you.

These next threads show example calculations using CLTV:

http://www.biggerpockets.com/forums/48/topics/8549...

http://www.biggerpockets.com/forums/12/topics/8248...

@Brian Sachs  A Line of Credit is used for SHORT term financing, while a term loan is designed for LONG term financing. I would encourage you to shop around for a more competitive rate on the Home Equity Loan. Best of luck!

To your question Joe, I was planning on using the equity short term to get started into buying properties and renting them out then moving onto the next with the same concept. Eventually being able to pay the loan off or refinance prior to balloon. need to do more homework. Il'll check the forum topics on the related material. Thanks.

@Brian Sachs  Ok.  You were planning on paying it off...how?  I'm not saying it can't be done, all I'm saying is until you have an actual plan, all you have is a problem.

William hit on something you need to understand, you don't use short term financing products for long term financing needs.

Home equity loans are designed for Harry Homeowner to fix the kitchen for momma, not really as a commercial venture that carries long term needs.

Read the fine print too, HELOC can be called under many events, your credit standing could trigger changes, it's not a product you can really trust long term.

Search the topic too, much has been posted about your ideas. :) 

I'd vote for the variable rate HELOC. I also agree somewhat with the other commuters about it being a short-term source of capital. @William Dampier   @Joe Villeneuve  However, I'd say that short-term is <1 year.  You could conceivably enter some kind of flip situation using the HELOC and then cash-out refi to repay the HELOC after 6 months.  I use my $100k HELOC as a big emergency fund and transient source for down payments.  That is, sometimes I max it out but only for a matter of weeks.  Most of the time, the balance is <$20k.

As what @Bill Gulley said, HELOC terms can change quickly. One time I had a $90k HELOC get cut down to $10k because housing values crashed.

So, getting a fixed rate long term would be the way to go (refinance or second). I'll research more and have a concrete future plan before moving forward.

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