HELOC vs Home Equity Loan
If you've built equity in your home, you have two main ways to borrow against it: a HELOC or a home equity loan. They both use your house as collateral, but they work very differently.
Quick Comparison
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Disbursement | Revolving line of credit | Lump sum at closing |
| Interest Rate | Variable (usually) | Fixed |
| Monthly Payment | Varies based on balance drawn | Same every month |
| Draw Period | Typically 10 years | N/A (one-time draw) |
| Repayment Period | Typically 10-20 years | Typically 5-30 years |
| Best For | Ongoing, multi-phase projects | One-time, known-cost needs |
What is a HELOC?
A Home Equity Line of Credit (HELOC) is a revolving credit line secured by the equity in your home. You're approved for a maximum amount and draw from it as needed during the "draw period" (usually 10 years). Most HELOCs only require interest payments during the draw period, then switch to principal + interest for the repayment period.
- Pros: Flexibility to draw only what you need, lower initial payments, pay interest only on what you use, can pay back and redraw
- Cons: Variable rates can rise, tempting to overspend, payment shock when draw period ends, harder to budget
- Best for: Multi-phase renovations, ongoing education costs, emergency reserves, irregular expenses
What is a Home Equity Loan?
A home equity loan (sometimes called a second mortgage) gives you a one-time lump sum at closing, which you repay with fixed monthly payments over a set term. The rate and payment never change.
- Pros: Fixed rate and payment, predictable budgeting, clear payoff date, no temptation to re-borrow
- Cons: Less flexibility, interest accrues on full amount from day one, higher closing costs
- Best for: Debt consolidation, large one-time purchases, predictable expenses, borrowers who want certainty
Variable Rate vs Fixed Rate: The Core Trade-off
HELOCs typically have variable rates tied to the prime rate. They start lower than home equity loan rates, but they can rise — sometimes significantly. If rates climb 2-3% during your draw period, your payment can jump just as much.
Home equity loans have fixed rates, so your payment stays the same for the entire loan. You'll usually pay a slightly higher rate upfront for that predictability.
Most lenders now offer fixed-rate HELOCs (or the ability to lock portions of the balance at a fixed rate), which gives you a hybrid option.
How to Choose
- Choose HELOC if: You don't know the exact amount you need yet, you want flexibility to draw over time, or you want lower initial payments.
- Choose home equity loan if: You have a specific amount in mind, want predictable payments, and prefer a fixed rate.
- Choose cash-out refinance instead if: Your first mortgage rate is also high — you might be able to refinance the whole loan and pull cash out at a better combined rate.
Run the numbers with our HELOC Calculator and Home Equity Calculator.
Frequently Asked Questions
Do both loans use my house as collateral?
Yes. Both are "second mortgages" — if you default, you risk foreclosure. Never borrow against your home for amounts you can't comfortably repay.
Are HELOC and home equity loan interest tax-deductible?
Interest is generally only deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. Consult a tax professional for your situation.
How much equity do I need?
Most lenders require 15-20% equity and let you borrow up to 80-85% of your home's value combined across all mortgages (including your first).
Which has lower closing costs?
HELOCs typically have lower closing costs, and some lenders waive them entirely. Home equity loans have similar costs to a first mortgage.