Home Equity Loan or Home Equity Line of Credit??

17 years ago

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 !!

Comments (6)

saphire
17 years ago
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
cactuscatie
Original Author
17 years ago
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...
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Hi gammyt, Unless you have a fairly high-ratio mortgage or are seeking a substantial loan, quite likely the lender may not be too worried about a precise evaluation. That said, though, with the recent mortgage problems, and general reduction in prices of homes in quite a few areas, perhaps they will be quite concerned, more so than they would have been a year or so ago. In any case, as part of the procedure related to setting up the loan, they may very well come out to make an evaluation on their own. Quite likely charging for doing so. If you have a connection with a realtor, quite likely that person would give you an estimate, even if only a rough one made after hearing a full description of the various aspects of the home, without coming out to look at it. Knowing nothing of your circumstances, other debts, including student, auto or of other kinds, I cannot speak with any knowledge of your situation. That said, I hope that you will make an attempt to get this loan that you are contemplating, paid off over a short term, if possible, especially if the reasons behind it have provided only a short-term benefit. When I see folks making a loan that they plan to pay off over, say, a five year period ... ... to finance a vacation which will take place this year only, it troubles me some. For the cost of that vacation is not only the money laid out now, but includes also the total amount of interest paid on that loan over the full term that one carries it. And repayment of the principal and interest is effectively a reduction in effective income over all of the period that you carry it. I am especially troubled, having been a personal financial advisor for a numbr of years, to see folks add such expenses to their e.g. 25 year mortgage ... ... which means that they'll be paying it off, plus interest, for 25 years. And, if they arrange to make no increase in the amount of their regular payment, it means that they don't really start paying off the principal of that loan until all of the earlier part of the mortgage is fully paid off - what, 15 years (oe more) down the road? What sense does it make to take a vacation, even buy a car, now ... and not start paying off the loan for 15 years? If you'd made a serious effort to have paid off the loan over a short period ... ... think of all of the other interesting/useful/enjoyable things that you could have done with all of that interest plus principal expense! Enough preaching ... about an issue that's none of my business! Good wishes for increasing skill at management of both your income and assets - nobody cares as much about your money as you (except someone that'd like to shift some of it from your pocket into his/hers). ole joyful
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Hi Len VT, If you've been holding your stocks for an extended period, you'll likely have a substantial capital gain built up and if you liquidate investments you'll have capital gain tax to pay, which will mean that you'll have to liquidate a larger amount of pre-tax asset value in order to have the after-tax amount needed for your renovation. Not only that, you'll have to pay commission to sell them and, after the house loan is paid off, commission again to re-purchase, supposing that you'd choose to buy the same stocks later. Not only that, I think that the markets are down now, so I'd rather not liquidate some of my stock market-based assets, these days, lacking serious need. In fact, I've been buying more, recently, and expect to buy more, later, as I expect an advance in the markets, though I think that it may be later than jkom51 thinks. I hear some folks telling of set-up costs related to a home equity line of credit, which is understandable, as a lender wants to be sure that the property is as claimed, is properly evaluated, lacks large loans against it now, etc. I have used stock certificates and mutual fund certificates as collateral for a line of credit, and had no set-up fees to pay. If you were to use stocks or mutual funds, you might qualify for a lower interest rate, in that liquidation would be much easier, in case of default. Also, I've allowed my line to sit unused for substantial periods, and there have been no inactivity fees, either. In fact, in that you have much larger assets than you'd need to liquidate to fund your upgrade, you might choose to take out a larger loan and make some increased equity investments currently. I understand that the interest rate on your home improvement loan would be deductible, but not being a resident of your country I'm not sure. If it is not, you'd want to keep the two loans separate, as the line of credit for further equity investment would be deductible in your area, I'm almost positive. While interest rates currently are low, I expect to see them rise, for when one considers the bad odour internationally that has developed in recent months over the U.S. sub-prime mortgage debacle, and the huge U.S. gov't. debt, much of it held abroad, it could well be that, in the light of the deficits developed recently, largely due to the Iraq war, it may be necessary for the U.S. gov't. to offer higher rates to foreign holders in order to entice them to make further loans, before long. Good wishes as you consider your options further - I hope that you are happy with your choices, later. ole joyful
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I'm an ametuer so take my comments at face value. First, understand that there are two types of loans: Home Equity Line of Credit (HELOC) and a Home Equity Loan. A HELOC works largely like a credit card in that you are approved for a certain amount and then you go spend it and your payments are calculated similar to a credit card. Depends on the agreement, but I know for mine at the five year point I couldn't charge anymore and was set on a payment schedule to pay off at 15 years. A Home Equity Loan is essentially a 15 year term loan from the beginning. They give you a set amount of money with a set payment schedule to pay it off in 15 years. This may be a worthwhile investment but I'll agree with Bill in making sure you can afford it. You mention a 6% rate which may be a guess on your part but in reality if that's the rate you can get then you've got credit problems and should reconsider this adventure.
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Yes, a home equity loan and a second mortgage are practically the same thing. You will see lenders using both terms. Technically, a home equity loan would not have to be a second mortgage. For example, if you owned your house free and clear (no mortgage), a loan against it wouldn't be a second mortgage, but would be a first mortgage. But the key point to remember is that whichever term they use, they are placing a lien against your home which is securing the loan. The best place to shop for this type of loan is at financial institutions where you currently do business or that are known to you. The first place to check is the mortgage company that holds your first mortgage. They often offer good deal to current customers. That's not to say that some of the lenders who advertise for customers aren't offering good deals -- some are -- but you have to look especially carefully at the closing costs and other fees with lenders who do a lot of mass market advertising. (Of course, you need to check these fees with any lender.) Often lenders will roll the closing costs back into your loan, so that you may get a check for the $10,000 you are seeking, but you may actually be borrowing more than that. In some cases, quite a bit more. Often a good time to get a home equity loan is when you refinance your home. If you are currently paying above market interest rates, consider refinancing and obtaining a home equity loan at the same time from the same lender you refinance with. Often in this case they'll give you a home equity loan with no additional closing costs. As far as the rates you've been quoted, the 4.75 percent seems closer to what I see being offered around where I live. The rates should apply to any amount of loan, not just to large amounts. In fact, many lenders will offer you a home equity line of credit instead of a straight home equity loan. Instead of giving you a check for the amount of your loan, you'll get a check book which allows you to write checks against your line of credit. This is preferable because you don't start paying interest on the money until you actually need it, and if you never need the whole $10,000 available in your credit line, you never actually borrow it. The balance on your home equity line of credit can go up and down just like a credit card balance, and you pay interest on just what you owe. With any loan, just be sure to understand all the fees and costs associated with it. Some lenders, especially those who advertise in the mass media, try to downplay or even hide the fees, and this can mean that what looks on the surface like a good deal isn't such a good deal once you dig down and see what you're really paying.
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saphire
17 years ago
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
nannygoat_gw
16 years ago
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
chelone
16 years ago
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!
talley_sue_nyc
16 years ago
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"

Home Equity Loan or Home Equity Line of Credit??

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Home Equity Loan or Home Equity Line of Credit??

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saphire

cactuscatieOriginal Author

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