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Suppose for the purposes of this question that you have (or can temporarily borrow) the entire cost of the house. Then you can a) get a mortgage on the house to pay off over a long time, or b) buy the house outright and then get a home equity loan.

The effects seem similar:

  • In both cases, you net pay only a part of the cost of the house
  • In both cases, you have to pay back money over a long time
  • In both cases, the loan holds part of the equity of the house

So what are the advantages and disadvantages of each, from feasibility, interest rate, tax and legal ramifications points of view?

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What interest rates can you get for the two different types of loan? Home equity loans are usually smaller, often have higher interest rates, and often have shorter payback periods. Also, depending on the deal being offered, you might be paying two sets of fees; one for closing on the house and buying it for cash, and another for taking out the home equity loan. –  Dilip Sarwate Jul 11 '12 at 20:32
    
If you didn't get the loan at the time of purchase there is maximum amount that can be deducted. –  mhoran_psprep Jul 11 '12 at 23:10
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2 Answers

up vote 5 down vote accepted

Home equity loan is a kind of a mortgage loan. So you're basically asking "what's better: mortgage or mortgage?".

Home equity loan is usually taken as a second mortgage on the house, while you're still paying the initial one, but accumulated some equity in the property.

In the scenario you're describing, there's no "second mortgage", there's only one mortgage. You can call it "The wonderful glorious bestest ever mortgage" or you can call it "home equity mortgage", and it would make no difference to the essence.

Look at the numbers, and decide which terms are better, not which name sounds nicer to you.

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Ah, but home equity loan sounds so much better than mortgage (literally, death grip like a choke hold) –  Dilip Sarwate Jul 11 '12 at 20:35
    
We used the Home Equity Loan as a first. You are right, it depends on the other issues. Name aside. –  JoeTaxpayer Jul 11 '12 at 20:41
    
Just for my understanding, is there a tax benefit on the mortgage loan in US, ie does one have to pay less tax and interest towards mortgage is deductible or something? –  Dheer Jul 12 '12 at 4:31
    
@Dheer mortgage interest is tax deductible –  littleadv Jul 12 '12 at 4:45
    
@littleadv: Thanks, is Home equity loan interest also tax deductible? In India the Mortgage interest would be tax deductable, but Home Equity Loan interest is not tax deductable. –  Dheer Jul 12 '12 at 4:50
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A home equity loan (not a HELOC home equity line of credit) typically comes with far lower fees, but a slightly higher rate.

As rates fell over the last decade, I saw a choice of the Equity Loan with no cost at all, or a refinance with a few thousand in closing costs. We refinanced 3 times with the home equity loan, the last one was 5%. As the 15 year regular mortgage hit 3.5%, it seemed worth the costs, about $1800, to get the low rate, and expecting that rates would go lower. The 1.5% savings on the balance put our breakeven at fewer than 6 months.

If you truly meant HELOC, the variable aspect is the risk, as rates how little room down from here, but much room to rise.

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