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HELOC vs Home Equity Loan: Which Keeps Your Low First Mortgage Rate?

Dom Bounasissi |
If you locked in a mortgage rate below 4% in recent years, you're sitting on what many call 'golden handcuffs.' Your low rate is valuable - possibly saving you hundreds per month compared to today's rates - but it can make accessing your home's equity feel complicated. The good news? You don't have to give up that rate to get the cash you need. This guide will walk you through everything you need to know about heloc vs home equity loan: which keeps your low first mortgage rate?. ## The Core Differences | Feature | HELOC | Home Equity Loan | |---------|-------|------------------| | **Interest Rate** | Variable (tied to Prime Rate) | Fixed (locked at closing) | | **Disbursement** | Draw as needed, up to limit | Lump sum at closing | | **Payment During Draw** | Interest-only option available | Full principal + interest | | **Payment Certainty** | Can fluctuate with rate changes | Same payment every month | | **Flexibility** | Borrow, repay, re-borrow | One-time funding, no re-access | | **Typical Start Rate** | 7.50-8.50% (variable) | 8.00-9.50% (fixed) | | **Best For** | Ongoing expenses, emergency backup | One-time need, rate certainty | ### When to Choose a HELOC **Ongoing projects**: If you're renovating over 6-12 months and drawing funds as contractors bill you, a HELOC lets you avoid paying interest on the full amount upfront. **Emergency backup**: HELOCs can sit unused with zero monthly cost. You're approved for access but only pay interest when you actually borrow. Think of it as a financial safety net. **Rate optimism**: If you believe rates will decline over the next 2-3 years, starting with a variable HELOC means your rate will drop as the Fed cuts rates. Just budget for the possibility that rates could also rise. ### When to Choose a Home Equity Loan **Single large expense**: Buying out an ex-spouse, paying for a major renovation with a fixed bid, or consolidating a known amount of debt? A lump sum makes sense. **Rate certainty**: If your budget is tight and a 2% rate increase would strain your finances, locking in a fixed rate provides peace of mind. **Discipline**: For borrowers who might be tempted to continuously tap a HELOC, a fixed loan provides structure. You get your money, make your payments, and there's no option to re-borrow. ## Making the Right Choice Your existing low mortgage rate is a valuable asset. On a $300,000 mortgage, the difference between 3.5% and 7.5% is $850/month - that's $10,200 per year. Second mortgages let you access equity without sacrificing that value. Yes, you'll pay more on the second lien (7-9% range), but your blended effective rate across both mortgages still beats refinancing your entire balance at today's higher rates. Do the math: calculate your total monthly payment with a second mortgage versus a cash-out refinance, then multiply by 12 months and by 5 years. The second mortgage typically saves tens of thousands. ## Your Next Steps Don't rush into home equity financing without understanding your full picture: 1. **Calculate your available equity**: Use the formula (Home Value × CLTV Limit) - First Mortgage Balance. Most lenders cap at 80-90% CLTV. 2. **Evaluate your DTI**: Add up all monthly debt payments including the new loan payment, divide by gross monthly income. Aim to stay under 43-45% for comfortable budgeting. 3. **Get multiple quotes**: Rates and terms vary significantly between lenders. A 0.50% rate difference on $50,000 over 15 years costs/saves $3,000+. 4. **Understand the total cost**: Calculate total interest paid over the loan term, not just monthly payment. That helps you evaluate if the expense justifies the long-term debt. 5. **Have a repayment plan**: Especially for variable-rate HELOCs, know how you'll pay it down within 5-7 years rather than letting it linger at minimum payments. The right home equity strategy depends on your specific goals, risk tolerance, and financial situation. Take time to understand your options, run the numbers honestly, and choose the path that serves your long-term financial health - not just your immediate cash needs. --- *This information is for educational purposes only and does not constitute financial or legal advice. Loan terms, rates, and requirements vary significantly by lender, borrower qualification, and geographic location. Always consult with a licensed mortgage professional to discuss your specific situation and obtain personalized guidance. Interest rates, program guidelines, and market conditions are subject to change without notice.*

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