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Home Equity

HELOC vs. Home Equity Loan

Updated Nov 14, 2023   |   10-min read

Many homeowners would agree that their property is one of their biggest assets, often growing exponentially 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. These funds can be used as you see fit, whether for debt consolidation, a family vacation, your child’s college education, or home remodeling. We’ll help you understand the differences between a home equity loan and a line of credit. 

In this guide:

Quick comparison of a home equity loan and HELOC

Here are some 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.

 Home equity loanHome equity line of credit (HELOC) 
What it isA lump sum loan backed by the value of a home and repaid in monthly installmentsA revolving line of credit based on a home’s equity, which can be pulled from as needed and repaid accordingly
Type of interest rateFixedMostly variable, but sometimes fixed
How you access fundsReceive set amount in one lump sumBorrow money as needed during the draw period
Withdrawal termsOne withdrawalMultiple withdrawals as needed
What do you pay interest onFull loan amountThe portion of the line of credit used
Best forHomeowners who have a specific dollar amount in mindHomeowners who want flexibility in using their home’s equity over time

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

Table showing the major differences and similarities between a HELOC and a home equity loan

There are 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 impact your monthly payment and result in a higher rate being charged over time. Fixed rates are set at the time of disbursement and allow for predictable monthly payments, but they can 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’re given an open-ended line of credit that you can pull 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 pull from the funds. The payment amount is based on your interest rate and how much you borrowed.

How are a home equity loan and HELOC similar?

HELOCs and home equity loans have some key similarities. They’re both secured by the equity in your home. Because of this, both carry the risk of losing your home if you cannot make payments as promised.

The amount you can borrow with either a home equity loan or HELOC is limited to a portion of the amount of equity you’ve built up in your home. 

Last, the interest rate structures may differ between HELOCs and home equity loans. Since both are a type of secured debt, the interest rates for each tend to be lower than for unsecured loan products. 

Pros and cons of home equity lines of credit

 As a flexible line of credit, a HELOC comes with several built-in benefits, including:

  • An adjustable interest rate, also known as a variable 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
  • Ability to access funds over the draw period as needed instead of receiving a lump sum
  • 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 the funds are used for home improvements

Although these benefits make a HELOC more flexible than other types of financing, there are drawbacks to consider. These include:

  • Potential for variable interest rates to rise based on market conditions, increasing the cost of borrowing
  • Potential for overborrowing, since you can withdraw funds whenever you need for whatever reason
  • Making interest-only payments may lead to a large amount of principal owed once the home is sold or the HELOC is closed
  • Could lose your home if you fail to make repayments as agreed
  • Upfront closing costs and fees

Pros and cons of home equity loans

As a fixed-financing vehicle, a home equity loan offers the following benefits:

  • 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
  • Ability to receive a one-time lump sum in the exact amount you want to borrow
  • Predictability in monthly payment amounts
  • Control over how much you borrow
  • Interest paid on a home equity loan may be tax-deductible, as long as the funds were used for an IRS-approved purpose

These benefits need to be weighed against the downsides of home equity loans. These disadvantages include:

  • 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 for different use cases?

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? Or can you have both a HELOC and a home equity line of credit?

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

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 originally anticipated, pull out more. If you change the project’s scope or come in under budget, you aren’t stuck paying interest on borrowed cash that 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 to getting out of debt for less. 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.

Looking to establish a financial safety net

Even if you never touch your HELOC, knowing that the line of credit is open and the money is accessible can serve as a great safety net. If you encounter a large expense or unexpected bills down the road, tapping into an established HELOC can quickly cover those costs.

Plan to pay for a single large expense

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

Instead, a home equity loan allows you to borrow what you need and when you need it. Nothing more, nothing less.

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

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

Applying for a home equity loan is similar to applying for a HELOC. First, 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. Of that, you’ll usually be allowed to borrow only a portion.

Both require an application and credit check. The better your credit history and score, the better your chances of approval and the lower the rates you’ll likely be offered. 

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.

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.

How to know whether to use a home equity loan or HELOC

HELOCs are flexible and allow you to draw down the line of credit as needed. This makes them great for ongoing projects or when you’re unsure how much money you’ll need. HELOCs can be used to pay for emergency expenses or unexpected repair bills as they arise. 

In contrast, a home equity loan provides a lump sum payment at the outset. This gives you access to a sizable amount of funding at once with predictable monthly payments and, often, a fixed interest rate. These can be useful when you know how much money you need to borrow for a specific purpose.

With either product, there are nearly no limitations on using the funds. Both can be used for various purposes like debt consolidation, home renovations, vacations, education expenses, and more. For that reason, homeowners should consider how they plan to use the money and look through the pros and cons mentioned above. 

Both HELOCs and home equity loans enable homeowners to access cash based on home equity. Before applying for either one, 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.