HELOC vs HELOAN, what's right for my borrower?

A HELOC is a Home equity line of credit, while HELOAN is a home equity loan. These two terms are sometimes used interchangeably, but there are a few differences between the two products. The biggest difference between the two has to do with how the money is distributed, and how the rate's amortized.


How the money is distributed
With a HELOC , there's an initial draw amount, and a total line amount. Each investor has their own requirements/ limits for these amounts. The initial draw amount is what the borrower will get when the loan closes. The total line amount is the max amount the borrower can use over the life of the HELOC. For example, if the initial draw amount is 20,000, and the total line amount is 100,000, then the borrower will receive 20,000 at closing. Because the total amount of the line is 100,000 the borrower can draw up to 80,000 more in the future ( depending on the investor's program characteristics).

With a HELOAN, there is no initial draw amount. The borrower will receive a lump sum payment of the full loan amount at closing. 

In order to determine which of these two products is best for your borrower's scenario, ask them if they're certain of the amount they need, and when they'll need the money. If they're unsure of the amount, a HELOC would probably be better since they can draw a bit up front, and borrow more later if needed.  If they know that they'll only need 100,000 for the entirety of the loan, a HELOAN would most likely be a better product due to how the rate amortizes over the life of the loan.

Rate's amortization
The rates on HELOCS are usually adjustable rate mortgages quoted as an index + margin. Because they are ARMS, their rates will change over the life of the loan.

HELOANS on the other hand, are usually fixed. Because of this, a HELOAN is usually a better product for those who know how much money they'll need throughout the life of the loan.