HELOC vs Home Equity Loan vs Other Products

[T-Max]

It’s finally time to start the addition on our house. I am curious if anyone here has experience with any of the home equity loan products. If you’ve used one, what was your experience? If you work in the sector, can you provide a brief comparison? I fell like I have a general understanding of g of the first two, but it’s been through conversation with folks trying to push their services…

A little background. My wife and I built our current setup ourselves with cash. It’s a 1200 sf post frame house on 5 acres which now has a couple nice outbuildings. The house is built on slab, so no wood in the ground like a pole barn. We’d like to tap into the equity to finance an addition since we have 2 kids now. Where it gets tricky is we would like to also do this ourselves.

The game plan is to borrow enough to complete a post frame shell with living space and an attached garage and finish the inside slower as time goes on. That will rule out the traditional construction loan/mortgage since we wouldn’t get a CO for some time. This will make our home a “forever home” so we will upgrade in a few key areas.

Thoughts? Concerns? Anyone done this before? Maybe I will start a build thread eventually and tap into you guys who build homes for advice in a bunch too.


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[Howboutthemdawgs]

A Heloc is a home equity loan. But that’s probably your best option to my understanding (which isn’t the gospel). Rates aren’t great but they are tied to prime and when they dropped fed funds rates, they fell as opposed to regular mortgages which are more correlated with treasury yields and they have been rising. Helocs are nice because you just draw on what you need (like a construction loan) so you are only paying interest on the drawn portion.
I’m sure someone in here is a lender and can probably correct me but that’s my understanding. Heloc’s are super common for additions and the like.

 

[T-Max]

A Heloc is a home equity loan. But that’s probably your best option to my understanding (which isn’t the gospel). Rates aren’t great but they are tied to prime and when they dropped fed funds rates, they fell as opposed to regular mortgages which are more correlated with treasury yields and they have been rising. Helocs are nice because you just draw on what you need (like a construction loan) so you are only paying interest on the drawn portion.
I’m sure someone in here is a lender and can probably correct me but that’s my understanding. Heloc’s are super common for additions and the like.

That was my understanding as well. How do you draw it? Do you request it and they wire it periodically? Is there an instrument like a check or card tied directly to the account? A HELOC has seemed like our best option to me as well.


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[Howboutthemdawgs]

That was my understanding as well. How do you draw it? Do you request it and they wire it periodically? Is there an instrument like a check or card tied directly to the account? A HELOC has seemed like our best option to me as well.


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It’s accessible on our online banking app. So when we need it we simply move it over to our account. Basically it’s at our disposal to use as we see fit. We are constantly moving funds back and forth in there for various reasons. The bank doesn’t care as long as you are paying their interest!

 

[Telemark]

A Heloc is a home equity loan. But that’s probably your best option to my understanding (which isn’t the gospel). Rates aren’t great but they are tied to prime and when they dropped fed funds rates, they fell as opposed to regular mortgages which are more correlated with treasury yields and they have been rising. Helocs are nice because you just draw on what you need (like a construction loan) so you are only paying interest on the drawn portion.
I’m sure someone in here is a lender and can probably correct me but that’s my understanding. Heloc’s are super common for additions and the like.

This is pretty much my understanding as well.

The emphasis is that you only borrow what you need, when you need it, rather than taking out a lump sum and paying interest on all of it immediately.

If you have no loans against your property, you're probably a shoo-in. Secured loans are relatively easy to get, so shop around for the best rate.

 

[Telemark]

That was my understanding as well. How do you draw it? Do you request it and they wire it periodically? Is there an instrument like a check or card tied directly to the account? A HELOC has seemed like our best option to me as well.


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The bank you take the line of credit from will explain all that in detail. It's generally very straightforward. Loaning money is their business.

 

[T-Max]

So I am gathering that a HELOC is probably the way to go. That is what I should be shopping for. Correct? The borrow as you go thing is very appealing.


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[Jerry-B-WI]

My understanding is that HELOC is a revolving line of credit that has to be repaid in a certain time frame, 10yr, 20 yr. A home equity loan is for a fixed amount of money at a fixed rate.

When we remodeled our kitchen we took out a home equity loan at a fixed rate for a fixed time. We figured our costs for cabs, stove, flooring etc. and added a cushion. It worked cause our project was being done all at once, not over a period of time.

The credit union we deal with told us that a HELOC has a cost to have. There's a fee just for the convenience of having the money available whether you are using it or not. The HELOC had a variable interest rate and the home equity loan was a fixed rate.

They both have their pros and cons. It's up to you to decide which fits your payment and use schedule.

Sounds like an exciting project, keep us poste how it goes.

 

[Brian662]

All good info here. I used to have a HELOC on my rental property that I used to pay for toys or other expenditures. It basically was a separate checking account with a check book for making purchases and then my tenants rent would pay for the balance.

If you don't have a mortgage currently or have enough equity, you may get a preferred rate for taking a primary home loan. Lots of ways to use your equity to buy stuff, I do it all the time!

 

[ksJoe]

home equity loan is basically a mortgage on a house you already own. Its probably 1 fixed payment to you, and you have a set repayment schedule.

A HELOC is a "line of credit". Think of a line of credit sorta like a credit card. You're not required to borrow any, but you can borrow up to the limit.
What I've seen is a 10 year interest only period, so you can borrow and repay anything up to the limit for the first 10 years. For example you could borrow for your current project, pay part of it back over a couple years, then borrow more for another project, etc. At 10 years, whatever balance you have converts to a standard loan with a 10 year payback period.

When we bought our current house we put a lot down so we had a lot of equity at closing. We opened a HELOC at time of purchase as an emergency fund. We didn't have any specific plans to borrow from the HELOC, it was just a "no questions asked" line of credit if we needed it. Then the '08 financial crisis hit and Bank of America (illegally) froze the HELOC. They sent us a letter citing housing price declines, which would be a legal reason to freeze it. But the law required specific research on a property before freezing a HELOC and our area had slightly increasing prices (so they didn't actually do any legit research). The real reason they froze it was that interest rates went lower than expected so the variable rate HELOC became an incredibly low interest rate (far lower than was attainable during the financial crisis). So I replied to their letter demanding a copy of their research, and reported them to the feds. A few weeks later they sent another letter stating that after further research they were unfreezing it. We ended up using it to buy a car because the rate was so good. That was the only thing we ever used it for.

The moral of this story is: the HELOC gives you a lot more flexibility, but until you've actually withdrawn the money the bank might back out.

 

[gjs4]

I have a HELOC and ksJoe is spot on. I have a checkbook, do what i want with it. The collateral for the loan is the equity in your house between what you've paid and what you owe on it. Your needed monthly payment increases as you "use up" that equity. Most offer a buy down option for rate annually. I wont say much more than this....but theyre a very powerful tool. Message me if you want....

Heres another thing Ill toss out (in general, per a lightbulb moment of my own) - Play around on a loan calculator with different monthly payments above the min, different mortgage rates, payment intervals, etc. Most of us have an ego with math we dont deserve. You pay biweekly on anything that you love or really want....or is a smoking good deal... AS A RESPONSIBLE user of your funds....and 2.5, 5, 15% doesnt matter....or at least in my opinion. I also drive a mom Ram, have a 1966 tractor and clothes from HS (30yrs ago).

 

[GMan5465]

You could also consider a cash out refinance. When we bought our hunting property, we refinanced our main home and pulled out as much cash as we needed. With this, I own my hunting property outright, but then had a loan on my main home. Might get a better rate. We timed it right with a 5/1 arm at 2.25%. Shop around on rates and closing costs, they are all negotiable. I use Wings Credit Union. They have been great to work with.

 

[cbw]

Agree with what all have said about HELOCs. We have several against our rentals. It’s a convenient way to access equity as cash. You may pay a bit more in interest—the price to pay for the flexibility.


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[T-Max]

You could also consider a cash out refinance. When we bought our hunting property, we refinanced our main home and pulled out as much cash as we needed. With this, I own my hunting property outright, but then had a loan on my main home. Might get a better rate. We timed it right with a 5/1 arm at 2.25%. Shop around on rates and closing costs, they are all negotiable. I use Wings Credit Union. They have been great to work with.

I asked about that with a couple lenders and since we don't currently have a mortgage, they didn't offer it as an option. Basically I am not refinancing anything. It did make me start to wonder if they push products as they are told by the brass. Everyone came back around to a home equity loan and didn't want to discuss other options. It is the main reason I asked about HELOC here, I couldn't get much info out of them.

 

[Telemark]

If you really want to cook your noodle, start fiddling with the loan calculators, as was previously mentioned. You might come to the conclusion that you don't want to hold any cash at all once you start drawing on the HELOC. You can throw all your cash and every paycheck into the HELOC to constantly keep the principal as low as possible. This assumes your interest rate is significantly higher than 4.5%. Currently, Sofi is offering 4% on savings accounts, and money market accounts can be up to 4.5% at several different banks. I'm currently transferring all of my cash to a money market account with Fidelity. I just transfer what I need back to my checking account when it's time to pay bills. Inflation is murder on savings, so I'm trying to keep as little actual cash as possible.

 

[Howboutthemdawgs]

If you really want to cook your noodle, start fiddling with the loan calculators, as was previously mentioned. You might come to the conclusion that you don't want to hold any cash at all once you start drawing on the HELOC. You can throw all your cash and every paycheck into the HELOC to constantly keep the principal as low as possible. This assumes your interest rate is significantly higher than 4.5%. Currently, Sofi is offering 4% on savings accounts, and money market accounts can be up to 4.5% at several different banks. I'm currently transferring all of my cash to a money market account with Fidelity. I just transfer what I need back to my checking account when it's time to pay bills. Inflation is murder on savings, so I'm trying to keep as little actual cash as possible.

That’s essentially what I did. I purchased a farm last year with a HELOC and paid it for it 100%. I have been throwing every bit of cash. I have coming in at the HELOC and just not holding any significant cash reserves and just transferring money as I need it from the HELOC. I have since sold the farm and it actually closes tomorrow and made a little bit of money off the farm, more than I would had. I just had that cash sitting in a money market and I got to hunt it for two deer seasons.

 

[Brian662]

That’s essentially what I did. I purchased a farm last year with a HELOC and paid it for it 100%. I have been throwing every bit of cash. I have coming in at the HELOC and just not holding any significant cash reserves and just transferring money as I need it from the HELOC. I have since sold the farm and it actually closes tomorrow and made a little bit of money off the farm, more than I would had. I just had that cash sitting in a money market and I got to hunt it for two deer seasons.

Congrats on the sale, glad you got it done.

 

[Howboutthemdawgs]

Congrats on the sale, glad you got it done.

Bittersweet but thanks! It was the right move

 

[T-Max]

If you really want to cook your noodle, start fiddling with the loan calculators, as was previously mentioned. You might come to the conclusion that you don't want to hold any cash at all once you start drawing on the HELOC. You can throw all your cash and every paycheck into the HELOC to constantly keep the principal as low as possible. This assumes your interest rate is significantly higher than 4.5%. Currently, Sofi is offering 4% on savings accounts, and money market accounts can be up to 4.5% at several different banks. I'm currently transferring all of my cash to a money market account with Fidelity. I just transfer what I need back to my checking account when it's time to pay bills. Inflation is murder on savings, so I'm trying to keep as little actual cash as possible.

All I do is play with loan calculators these days it seems... But I hadn't thought about the land thing. I am trying to do both. So basically use the HELOC at some point for the land purchase and not have to fool with a separate loan?

 

[Howboutthemdawgs]

All I do is play with loan calculators these days it seems... But I hadn't thought about the land thing. I am trying to do both. So basically use the HELOC at some point for the land purchase and not have to fool with a separate loan?

My banker told me a heloc is the cheapest money for land currently. Land loans require a healthy down payment and the rate is very high