heloc vs HEL

[Dustan Marshall]

I am attempting to refinance my investment property. I am looking to pull some equity out at closing to help pay off the rehab work I did on the property that I put on a credit card.

The bank as offered me a HELOC or a Home Equity Loan. Don't know much about either. So lets educate me and help me choose which route to go!!!!

[Andrew S.]

@Dustan Marshall First of all, I'm impressed that you were able to find a bank willing to do a HELOC on rental property - that seems to be pretty unusual (most banks only do HELOCS on owner-occupied properties.

Anyway, usually a HEL is a fixed loan amount often at a fixed interest rate. A second mortgage - you close on the loan, get a check and start paying interest (and usually principal) just like on any other mortgage.

A HELOC is a line of credit. It comes at variable interest rates (typically prime lending rate plus same small percentage, so if the prime rate goes up, then your interest rate goes up. The big difference to HEL is that you only draw what oyu need and pay interest for what you took out. So, if your HELOC is for 50K and right now, you only need 15K for your rehab, then you just take out 15K and that's what you pay interest on. You can then pay down the balance (and lower interest payments) or draw more, as needed. You literally get a checkbook and can write checks for any expenses as they occur.

So, HEL: predictable terms, all cash comes at once, locked in interest rate, locked in payments

HELOC: variable interest rates, tap in as you need (flexibility), pay off - re-draw, as you wish

It comes down to what you need the cash for. If you have one big 50K rehab bill, then perhaps HEL is better but if you want to flexibility of locking in credit without paying interest from day one, go with HELOC.