HELOAN or HELOC to fund ADU or buy another SFR for STR

[Albert Cua]

Hello everyone! I am a rookie with real estate world. We currently own a home with 4 bedroom and are under construction for the 5th bedroom. We started house hacking 10 years ago not knowing it was. We rent 2 of our bedrooms to international students until the pandemic happened. Last October we switched to Airbnb and doing great so far. 

Now to get to my questoin. We are looking to either build an ADU on top of our garage in our backyard or buy another property. We are planning to get either HELOC or HELOAN to fund it. The interest rate for the HELOAN is 6.699 FIXED rate, 30 yrs term with $1500 fees. The HELOC interest rate range is 3.99-4.625 (just an estimate until they run our credit etc). The loan amount is 200k.

Which one is better for the long term? 

Thank you in advance.

[Kristofer Koons]

Great question! I worked out the numbers for both and the HELOC would save you about $70K assuming that it is a fixed rate of 4.625 with a 10 year draw and 20 year repayment period. This is directly comparing the HELOAN vs HELOC at 30 years with no additional payments and no refinances