Home Equity Loan or Home Equity Line of Credit??

cactuscatieApril 17, 2007

We are doing some major renovations in our home. We just don't know whether to apply for a home equity loan or a HELOC. The interest rates are different (HELOC is prime+.5), home equity loan is fixed. Is it better to take out the home equity loan with fixed rate and start paying on whole amount? Or apply for the HELOC, make payments on what we use but pay the higher interest rate? Also, is there a home equity loan where you just pay the interest?

I might add that this loan is to pay for renovations to our new home. When we sell our old home, the loan will be paid off. Any help in deciding which is the best loan to apply for will be greatly appreciated. It is so confusing !!

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How quickly do you plan to use it, what is the fixed rate, are you only going to use part at a time. Most importantly when will your house sell (slow market?) finally do either have any closing costs

    Bookmark   April 17, 2007 at 5:00PM
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saphire, we plan on using the money right away. Of course, with the renovations, which should last 3 months, we will pay in increments, so yes we will use part at a time. But after all is said and done, the moneys owed will be the same amount. The fixed rate is 5% on the home equity loan. And yes most importantly, when will we sell our house. There's no way to tell, could be 1 month, could be a year. It's going to be listed in the next 2 weeks. So again, in the end we will be paying on the same amount. What to do???? Thanks for any help, advise, etc...

    Bookmark   April 17, 2007 at 5:54PM
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Any closing costs or fees whether to the bank or title company? This would be a big deciding factor mor than anything else probably. You should not be paying any fees

Make sure there are no prepayment penalties either

5% is an amazing rate. What bank did you get this at?

Prime +5 is about 8.75% so huge difference. Run the numbers. If you are taking 100,000 over a year. Assuming no fees in either case, would be 8750 v 5000 so loan is better. However, if it takes you longer to do the renovations, then you might only be taking out 50k over the first 3 months, saving several 1000 dollars. Also, with a line as you start paying it back your rate effectively reduces however, assuming you do this for 6 months and pay back interest only , it would be 4375.

However if you only borrow half the amount for the first 3 months until the work is complete, then it would be 2187 + 1093 = 3280 over 6 months interest only with the line. This assumes interest rates stay the same, they could go up which would cost even more

With the loan it would be 100k over 6 months, interest only would be 2500 so this is the better deal in my scenario. so assuming there are no closing costs or fees, you are doing interest only and there are no prepayment penalties I would do the loan

    Bookmark   April 17, 2007 at 9:09PM
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Having had both, I would go with the Home Equity Loan. The HELOC does not have a fixed rate and it changes every 6 months or so. In our case, the rate we ended up with was several percentage points above what we started with

    Bookmark   June 9, 2007 at 4:10PM
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We're going to use a home equity loan to build our garage. I like knowing what the interest rate is and will REMAIN until the term of the loan is up.

We will be able to make payments to principle at any time and pay the entirety of the loan off at any time AFTER two years' term. Before that time, there will be a fee/"penalty" assessed. There is no such "penalty/fee" at the the other bank we've approached, but the interest rate is higher (first is 7.5%, second is 8%).

The whole garage project has really shown me that I know DIDDLE about the lending industry when it comes to mortgages. I STILL don't understand "points". It's complicated stuff. And scare-y!

    Bookmark   July 7, 2007 at 1:40PM
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5% is an amazing rate. What bank did you get this at?

Prime +5 is about 8.75% so huge difference.

it's "prime + .5", not "prime+5"

    Bookmark   July 17, 2007 at 12:38PM
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