Choosing between a HELOC vs. home equity loan is a big decision. HELOCs have variable interest rates and home equity loans have fixed rates, but that’s not the only difference.
Check out how they compare to see which makes the most sense for your real estate business.
What Is a HELOC?
A HELOC or home equity line of credit is a second lien on your property. It’s separate from any first mortgage liens you have on it.
A HELOC works much like a credit card. You receive a credit line that you can access as you need. There isn’t a limit to how much you can withdraw, up to the credit line’s limit. HELOCs have a draw period and a repayment period.
Draw period
The draw period determines how long you can withdraw funds using a linked debit card or by writing checks. You can make interest payments or repay the borrowed principal, plus interest, during this time.
If you repay what you borrowed, you can draw funds from the credit line again until the draw period ends.
The repayment period
The repayment period begins when the draw period ends. During the repayment period, you make principal and interest payments monthly.
HELOCs have a variable interest rate, so you won’t know your payment amount from month to month as it depends on how the market performs.
What Is a Home Equity Loan
A home equity loan is also a second mortgage on the property. However, unlike a HELOC, you receive the funds in one lump sum instead of a credit line. You can use the funds however you want, even creating your own credit line by putting the funds in a savings or money market account to draw from as needed.
Fixed interest rate
Home equity loans have a fixed interest rate, unlike HELOCs. So you know from the time you sign the loan documents what interest rate you’re paying. It never changes, and neither do your monthly payments. You pay the same amount each month.
When monthly payments start
You start making monthly payments, usually on the first of the month…