Which costs less for the same $50,000, a home equity loan, a HELOC or an HEI?

Summary

On published terms from U.S. Bank, Third Federal and Aspire, a fixed home equity loan was the cheapest way to take $50,000 out of a $500,000 home, whether the house sold in year 3 or year 10. Second place depends on the house. If its value stays flat for ten years, the home equity investment finishes ahead of the HELOC; if the home gains 3% a year, the investment becomes by far the most expensive of the three.

Where the HELOC falls behind

Most of the gap between the loan and the line of credit opens after year 3, and it comes from the payment schedule, not the rate.

U.S. Bank shows a 7.40% fixed rate on 10-year second-position loans of $50,000 to $99,999, for borrowers with a FICO score of 730 or higher, a loan-to-value ratio of 60% or less and automatic payments from a U.S. Bank account. Its example is $590.90 a month for 120 months, with no closing costs. Third Federal's line of credit carries 6.49% in Franklin County, Ohio, priced at prime minus 0.51%, with no closing costs and a $275 annual fee. Its own example puts the payment on a $50,000 balance at $315.71, which is the amount that retires the balance over 30 years.

The line's rate is lower, and for three years that nearly makes up for the fee. Sell in year 3 and the loan has cost $9,921 against the line's $10,396. By year 10 the loan is paid off, while the line has taken $37,885 in payments and still owes $42,377. That puts the loan at $20,908 and the line at $33,013.

The investment's cost is set by the sale price

Aspire works out its share by taking the cash as a percentage of the home's appraised value and multiplying it by 3.25. Ten percent becomes 32.5%, and that share applies to the change in the home's value. The change is measured from a starting value 15% below the appraisal, which on a $500,000 home is $425,000. A 3% processing fee and third-party closing costs come out of the cash you receive.

Hold the house flat and Aspire is still owed $74,375 at the sale, because the starting value sits $75,000 under the price and 32.5% of that gap is $24,375. That figure is the same in year 3 as in year 10.

Sale year	U.S. Bank loan	Third Federal HELOC	Aspire HEI, flat home	Aspire HEI, home up 3% a year
Year 3	$9,921	$10,396	$25,875	$40,943
Year 10	$20,908	$33,013	$25,875	$81,761

Every figure is what was paid before the sale, plus what was owed at it, minus the $50,000 received. The HELOC column counts one annual fee per year. The HEI columns include the $1,500 processing fee and leave out Aspire's third-party closing costs, which it does not publish. Both debts hold today's rates, the line pays only the $315.71, and the home carries a $200,000 first mortgage, so the loan-to-value ratio after the draw is 50%.

When the house loses value

Aspire's FAQ is plain about the other direction: "If the value of the home goes down, Aspire will receive less." Sell for $400,000 and the formula gives $41,875, less than the $50,000 handed over at the start. Neither debt moves with the sale price, so a buyer's offer changes nothing on the loan or the line.

Aspire also limits the amount due to a 12% annual return, compounded monthly, when the agreement ends in the first three years, and up to 18% from year 4. The FAQ does not say what that return is measured on. Measured on the $50,000 alone, three years at 12% comes to $71,538, which is below both year-3 settlements above ($74,375 flat and $89,443 with 3% growth), so depending on the base, the year-3 HEI figures could come in lower than the table shows.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.