If you’re a homeowner with some equity built up, borrowing against it can be a powerful way to finance home improvements, consolidate debt, or cover a major expense. But choosing between a home equity loan and a home equity line of credit (HELOC) isn’t always easy. Both options let you tap into your home’s value—but they work in very different ways.
Understanding how each one operates—and what kind of borrower it’s best suited for—can help you make the smartest, most affordable decision for your situation. Whether you’re trying to upgrade your home or pay down high-interest debt, here’s what you need to know.
What Is Home Equity?
Before we dig into the details, let’s talk about what “home equity” actually means. Your home equity is the difference between your home’s market value and what you still owe on your mortgage. If your home is worth $250,000 and your remaining mortgage balance is $150,000, your equity is $100,000.
As you pay down your mortgage and your home’s value increases, your equity grows. Home equity loans and HELOCs are tools that let you borrow against that equity, using your house as collateral. That usually means lower interest rates than personal loans or credit cards—but also greater risk, because your home is on the line if you fall behind on payments.
Home Equity Loan: The Basics
A home equity loan works like a traditional loan. You borrow a fixed amount of money upfront and repay it over time with regular monthly payments. The interest rate is typically fixed, meaning your payment won’t change over the life of the loan.
This makes home equity loans a great option for people who have a specific expense in mind and want predictable payments. Common uses include large home renovations, paying off high-interest credit card debt, or covering major medical bills.
Because the terms are fixed, budgeting is easier. You know exactly how much you owe each month and when the loan will be paid off. Most loans last between 5 and 20 years, and because your home secures the loan, interest rates tend to be lower than unsecured loans.
HELOC: The Flexible Option
A home equity line of credit, or HELOC, is more like a credit card. You’re approved for a credit limit based on your home’s equity, but you only borrow what you need, when you need it. During the draw period—typically 5 to 10 years—you can borrow, repay, and borrow again, up to your limit.
HELOCs often come with variable interest rates, meaning your payments can go up or down over time. After the draw period ends, you enter a repayment period (usually 10 to 20 years) where you can no longer borrow and must start paying down both principal and interest.
This structure makes HELOCs ideal for ongoing or unpredictable expenses, like phased home repairs, tuition bills, or temporary income gaps. But the flexibility comes with some risk. If rates rise—or if you borrow more than planned—your monthly payment could climb, making it harder to manage.
Key Differences Between Home Equity Loans and HELOCs
While both options tap into your home equity and offer lower interest than personal loans, there are some important distinctions.
A home equity loan gives you a lump sum with a fixed interest rate and predictable monthly payments. This is best for a one-time need with a clear budget. A HELOC gives you a revolving credit line with a variable interest rate and more flexible borrowing terms, which works well for ongoing expenses.
Home equity loans offer more financial certainty, while HELOCs offer more financial flexibility. Your choice depends on how you plan to use the money and how comfortable you are with potential payment changes.
Because both are secured by your home, you’ll need to go through a formal approval process, including a credit check, income verification, and sometimes a home appraisal. Lenders usually require at least 15% to 20% equity in your home before they’ll consider lending.
Costs and Fees to Consider
Like any major financial product, both home equity loans and HELOCs come with fees. These can include application fees, closing costs, and annual maintenance charges. Some lenders waive these fees to attract customers, while others roll them into the loan balance.
Make sure to read the fine print and ask questions. Does your loan have a prepayment penalty? Will your HELOC rate increase significantly after a promotional period? Are there fees if you don’t use the HELOC? Knowing the answers ahead of time can help you avoid surprises—and better compare offers between lenders.
Keep in mind that interest on home equity loans and HELOCs is only tax-deductible if the money is used to “buy, build, or substantially improve” the home securing the loan. This rule changed in 2018, so be sure to check with a tax professional or review the latest IRS guidance if you’re hoping for a deduction.
One Decision-Making Tool to Help
If you’re stuck deciding between a loan and a line of credit, here’s a helpful way to break it down:
If you know exactly how much you need—and you want to lock in your payments—a home equity loan is probably your best bet. If you need access to funds over time, and you’re comfortable with some fluctuation in your monthly payment, a HELOC offers more flexibility.
Your credit score, income, and long-term financial plans also matter. A loan may be easier to budget for, but a HELOC may cost less in interest if you only borrow what you need. It all comes down to your personal goals and how you plan to manage the money.
The One Time to Avoid Both
If you’re struggling with debt or facing uncertainty around your income, borrowing against your home may not be the right move. Falling behind on a credit card is bad—but falling behind on a home equity loan or HELOC can put your house at risk. These tools are best used when you have stable finances and a clear plan for repayment.
If you’re unsure, talking to a HUD-approved housing counselor or a financial advisor can help you weigh your options and choose the right path.
Final Thoughts: Use Your Equity Wisely
Your home is likely your biggest asset—and using its value wisely can help you move forward financially. Whether you choose a home equity loan or a HELOC, both options offer affordable access to cash with the power of lower interest rates. But like any loan, they come with risks.
Make sure you understand how each product works, compare offers from multiple lenders, and have a clear plan for how you’ll use and repay the money. The right choice can help you upgrade your home, pay off debt, or reach your goals—without putting your future on shaky ground.
Sources
Consumer Financial Protection Bureau – Home Equity Loans
Consumer Financial Protection Bureau – HELOCs
IRS – Home Equity Interest Deduction Rules
Bankrate – HELOC vs. Home Equity Loan
HUD – Housing Counseling
