HELOC vs. Home Equity Loan

Many homeowners would agree that their property is one of their biggest assets, often skyrocketing in value over time. And as that home’s value increases, it continues building home equity, or the difference between its current market value and any mortgage debt.

As a homeowner, you may need to tap into the value of your home for various purposes. You can access your equity by selling your home at a profit—but if you don’t want to move, you might choose a home equity loan or home equity line of credit (HELOC) instead.

HELOCs and home equity loans are a source of financing based on your home’s value. You can use these funds as you see fit. We’ll help you understand the differences between a home equity loan and a line of credit. 

Quick comparison of a home equity loan and HELOC

Here are the differences between home equity loans and HELOCs. This can help you determine which home equity financing is best for you based on your preferences and needs.

What are the main differences between a home equity loan and HELOC?

These are the most important differences between HELOCs and home equity loans:

• Interest rates. HELOCs are generally variable-rate products, while home equity loans are often fixed-rate products. A variable interest rate can affect your monthly payment and result in paying a higher rate over time. Fixed rates are set at disbursement and allow for predictable monthly payments, but they never go down, even if market rates decrease.
• Accessibility. With a home equity loan, you borrow a lump sum at once. With a HELOC, you get an open-ended line of credit you can borrow from as needed.
• Repayment structure. Home equity loans require you to repay the debt monthly over a specified loan term. HELOCs only require payment when you borrow funds. The payment amount is based on your interest rate and how much you borrowed. HELOCs have two phases: the draw period and repayment period. During the draw period (often five to 10 years), you can often make interest-only payments, with full principal-and-interest payments due during the subsequent repayment period, which often lasts 10 to 20 years.

How are a home equity loan and HELOC similar?

Here’s how the products differ:

• HELOCs and home equity loans are both secured by the equity in your home. Both carry the risk of losing your home if you can’t make payments as promised.
• The amount you can borrow with either a home equity loan or HELOC is limited to a portion of the equity you’ve built up in your home. 
• The interest rate structures may differ between HELOCs (variable rates) and home equity loans (fixed rates). 

Pros and cons of home equity lines of credit

Here are the pros and cons of a HELOC.

Pros

• Adjustable interest rate, aka variable rate, may be lower than the interest rate on a personal loan or credit card

• Access to more financing than a credit card or personal loan can offer

• Ability to access funds over the draw period as needed

• Payments based on the amount withdrawn vs. the full line of credit allowed

• Option to make interest-only payments for a portion of the repayment period

• Control over how much you borrow

• Interest payments may be tax-deductible if you use the funds for home improvements and choose to itemize your deductions

Cons

• Potential for variable interest rates to rise based on market conditions, increasing the cost of borrowing

• Ability to withdraw funds as needed can create the potential for overborrowing

• Making interest-only payments may lead to a large amount owed once you sell the home or close the HELOC

• Could lose your home if you fail to make repayments as agreed

• Upfront closing costs and fees

Pros and cons of home equity loans

These are the pros and cons of home equity loans. As you can see, certain benefits and downsides are common between both products.

Pros

• A fixed interest rate that may be lower than the interest rate on a personal loan or credit card

• Access to more financing than a credit card or personal loan can offer

• Get a one-time lump sum in the exact amount you want to borrow

• 
  Predictable monthly payment amounts

• Control over how much you borrow

• Interest paid on a home equity loan may be tax-deductible if you use the funds for an IRS-approved purpose and itemize your deductions

Cons

• Potential for overborrowing if you’re unsure of how much money you’ll need to accomplish your goals

• No option to borrow additional funds in the future if your needs change

• Could lose your home if you fail to make repayments as scheduled

• Upfront closing costs and fees add to the total expense

Which is better?

It’s easy to see how HELOCs and home equity loans compare. But which should you choose if you want to tap into your home’s value? And can you have both?

Here are several scenarios and which home equity product makes the most sense.

Scenario	Home equity loan or HELOC?
Home improvements with an unpredictable cost	HELOC
Need to pay off high-interest debt	Home equity loan
Want to establish a financial safety net	HELOC
Plan to pay for a single large expense	Home equity loan

Home improvements with an unpredictable cost

If you aren’t yet sure how much you’ll need to borrow against your home’s equity, a home equity line of credit often makes the most sense. With a HELOC, you can pull from the open credit line as needed during the draw period, based on when you need money and how much you need to borrow. 

If you need to borrow more than you anticipated for home improvements, pull out more. If you change the project’s scope or come in under budget, you aren’t stuck paying interest on borrowed cash you didn’t need.

Need to pay off high-interest debt

Whether you have high-interest credit card debt, personal loans, student loans, or auto loans, a home equity loan can be one solution for debt consolidation. By borrowing a lump sum, you can pay off your debt balances, eliminate higher interest rates, and then begin repaying the new debt as agreed.

Want to establish a financial safety net

Even if you never touch your HELOC, knowing the line of credit is open and the money is accessible as an emergency fund can provide peace of mind. If you encounter a large expense or unexpected bills down the road, tapping into an established HELOC can cover those costs.

Plan to pay for a single large expense

If you know you only want to use your home equity for a one-time purchase or expense—such as paying for a wedding or replacing the roof on your home—you may not need a HELOC. 

How to choose

A home equity loan allows you to borrow what you need, and HELOCs are flexible and allow you to draw down the line of credit as needed.

You can use both for almost any purpose, including debt consolidation, home renovations, and education expenses. Consider how you plan to use the money, and review the pros and cons. 

Before applying for either product, shop around to find the most attractive offer. Consider the long-term cost of that loan and whether you can feasibly afford the monthly payment.

Find out about when it might make sense to have a home equity loan and a HELOC.

Is the application process the same for both a home equity loan and HELOC?

Yes, applying for a home equity loan is similar to applying for a HELOC.

1. Determine how much equity you have in your home and whether you’ll qualify for one of these products. Depending on the lender, you may need anywhere from 15% to 30% equity. You can borrow a portion of that.
2. Both require an application and credit check. The better your credit history and score, the better your chances of approval and of getting lower rates. 
3. You should give an estimate of your home’s value. Depending on your lender’s requirements, you might be required to get a new appraisal on your home to determine its current market value.
4. Your lender will also want you to provide personal and financial information, whether you’re applying for a HELOC or home equity loan. These documents could include bank statements, pay stubs, prior tax returns, property tax statements, and more.