HELOC Vs. Home Equity Loan For a Down Payment: Which Is Best?

When you’re getting ready to buy a home — whether it’s for a primary residence or a rental property — it’s important to consider how you’ll come up with the down payment. If you already own a home (and have equity in it), two of your options are to get a home equity loan or a home equity line of credit (HELOC).

But before you jump in, it’s essential to understand the pros and cons of these loan options. This comprehensive guide explores the ins and outs associated with leveraging your home’s equity for a down payment, helping you make an informed decision for your financial future.

Both types of loans are based on the amount of equity in your home. However, the way the funds are disbursed and how you pay them back have some key differences. With a home equity loan, you borrow a lump sum of money and it often comes with a fixed interest rate and equal monthly loan payments. That makes these types of loans easier to budget for and often come with better interest rates than other lending products.

By contrast, a HELOC is a revolving line of credit, similar to a credit card, where you can access funds as needed, up to your approved credit limit. It’s also important to note that HELOCs usually have variable interest rates, which can make your monthly payments less predictable. However, in most cases, HELOC payments during the draw period consist of interest-only payments, which can give borrowers more flexibility when repaying their line of credit.

In either scenario, borrowers need to be aware that either type of loan uses the primary residence as collateral. Essentially, if you can’t make your loan payments, you risk losing your house and all that equity you’ve worked so hard for, says Andy Heller, a real estate investor, author, and educator at RegularRiches.com