Should you pick the home equity loan or the HELOC when both come from the same lender?
Summary
Two things decide it: when you will spend the money, and how high a payment you could carry if the rate climbs. At Navy Federal, spending $50,000 in two halves a year apart costs about $1,955 less in first-year interest on the HELOC than on the 10-year fixed loan. The HELOC's rate, though, is allowed to run anywhere from 3.99% to 18%, and at 18% the interest alone on $50,000 is $750 a month.
Why one lender makes the comparison cleaner
When the two finalists come from different companies, a difference in cost can come from the rate, the fees or the structure, and it is hard to tell which. Navy Federal Credit Union says it pays all closing costs on both its fixed-rate equity loans and its HELOCs, so putting its two products side by side leaves mostly the structure.
Its published floors are 7.650% APR for a 10-year fixed equity loan and 7.000% APR for a home equity line. Both assume a 750 FICO score, a primary residence and a maximum HLTV of 70%, and both go up to $500,000. HELOCs are not offered in Texas.
Paying a contractor twice
Say the work happens in two stages a year apart, $25,000 each time.
| First 12 months | 10-year fixed loan at 7.650% | HELOC at 7.000% |
|---|---|---|
| Amount borrowed | $50,000 on day one | $25,000 on day one |
| Monthly payment | $597.43 | depends on the plan's minimum |
| Interest for the year | $3,705 | $1,750 if the $25,000 stays drawn |
| Balance after 12 months | $46,536 | $25,000 before the second draw |
The loan charges interest on the half that is still waiting for the second stage. The line charges interest only on what has been drawn, which is where the $1,955 comes from. If both halves are spent at once, that advantage disappears and the comparison turns on the rate alone.
What the rate range means in dollars
Navy Federal states that a HELOC "has a minimum APR of 3.99% and a maximum APR of 18%." On $50,000, each percentage point is $500 a year in interest. At today's 7.000% the monthly interest is $291.67. At the 18% ceiling it is $750. The loan's $597.43 does not change for ten years.
That gap, from $291.67 to $750 with no principal paid, is the risk the line carries and the loan does not. In the two-stage example, the extra $1,955 of first-year interest on the loan is the price of taking it off the table.
What the lender has to put in writing
For a HELOC, Regulation Z (12 CFR 1026.40) sets out what a lender must disclose. Two items help most when you are deciding between these two products. One is a statement that the lender may, under certain conditions, end the plan and require the balance, stop further draws or lower the limit, together with either those conditions or a note that you can get them on request. The other is an itemized list of the fees the lender charges "to open, use, or maintain the plan," with the amount or percentage and when each is due.
The loan side needs less paperwork to compare: a fixed payment, a fixed term, and the balance left in whatever year you expect to sell.
Sources
- Navy Federal Credit Union, navyfederal.org/loans-cards/equity/home-equity-rates.html
- Legal Information Institute, law.cornell.edu/cfr/text/12/1026.40
- CFPB, consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-home-equity-loan…
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.