While a home equity line of credit and a 30-year fixed rate mortgage are generally very different loans, they can be used for similar purposes. When you're looking to take equity out of your house, a cash-out refi with a 30-year loan can be an alternative to a HELOC. On the other hand, if you don't owe very much on your home and just want to be able to tap its equity, using a HELOC to pay off your mortgage so that you only have one payment may be another option for you.
A 30-year fixed rate loan has the same interest rate for its entire life, while HELOCs usually are adjustable rate loans tied to the prime rate. If you take out your loan while interest rates are low, there's a chance that the 30-year loan will cost you less over its life since its rate won't adjust up if interest rates in the market do. On the other hand, a HELOC's adjustable rate can be a benefit if you take the loan out when interest rates are high. Instead of locking in a high rate with a fixed loan, a HELOC will let you benefit if interest rates adjust downwards.
With a 30-year mortgage, your payments are precalculated so that you pay the loan back 30 years after you first take it out. If you don't have a prepayment penalty, though, you can choose to pay more and so pay the loan off more quickly. HELOCs typically have two payment periods -- a draw period when you can use the line to borrow money -- and a payback period. Frequently, you only pay interest during the draw period, although you may choose to pay back principal. The payback period may be shorter than 30 years, leading to higher payments. You can also choose to have the loan structured with payments of principal or even a fixed rate during the draw period.
A HELOC offers flexibility not available with a fixed loan. With a 30-year mortgage, you take your money up front, so if you are doing a cash-out refinance, you start paying interest on all of the money from the date the loan is made. On a HELOC, you are allowed to take out money as you need it during the draw period. This means that you aren't paying interest until you actually take and use the funds.
Ability to Tap Equity
Your ability to use either loan to get equity out of your house will depend on how much of your home's value lenders will let you borrow. As of September 2013, conventional cash-out mortgages were capped at 80 percent of your home's total value, while the Federal Housing Administration's cash-out refinance program lets you pull out up to 85 percent of your home's value on a 30-year fixed mortgage. Home equity lines of credit are also capped to let you borrow no more than 80 percent of your home's value after adding your first mortgage, if any, and HELOC together. Some lenders may be more generous, though.
- Freddie Mac: Cash-Out Refinance Mortgages
- Pinnacle Capital Mortgage Corporation: FHA Guideline Summary Matrix
- The Mortgage Professor: What Is a HELOC?
- Wells Fargo: Home Equity Line of Credit
- New York Times: Easing Home Equity Standards
- Bankrate. "Home Equity Loan Rates." Accessed July 14, 2020.
- Bankrate. "Home Equity Line of Credit Rates." Accessed July 14, 2020.
- HousingWire. "Chase stops accepting HELOC applications." Accessed July 14, 2020.
- Wells Fargo. "Answers to frequently asked Mortgage and Home Equity questions." Accessed July 14, 2020.
- United States Congress. "H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018." Accessed July 14, 2020.
- Internal Revenue Service. "Interest on Home Equity Loans Often Still Deductible Under New Law." Accessed July 14, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.