HELOC vs Home Equity Loan

[Michinori Kaneko]

Hi everyone,

I purchased my primary resident in Queens, NY about 5 years ago. Thanks to crazy NY Real estate market, I have significant amount of equity on my PR which i'm considering tapping into to invest in other rental properties. I've looked around on past posts as well as google, but I can't seem to find any reason why anyone would choose HEL over HELOC. Let me know if I'm missing anything:

1. HELOC allows you to draw as much as you need (up to limit) when you need it, as opposed to HEL gives you everything at lump sum, whether you need everything or not.

2. HELOC allows you to pay interest only, where as HEL requires P&I like mortgage

3. HELOC are mostly Variable interest rate, but you CAN find fixed interest ones.

Let me know if i'm missing something.  Thank you!

[Andrew Postell]

@Michinori Kaneko HELOCs are great products if you have a good plan to pay it back. They have low costs, you only pay interest when you draw.....but they have adjustable rates AND they "mature" into something else after a while. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

So if use a HELOC, pay it back, use it again, pay it back...it is PERFECT. That's why flippers LOVE HELOCs and LOCs. But if you aren't planning to pay it back please be very, very careful. Maybe a cash out loan might be more appropriate.

Hope this helps!