Homeowners have two powerful ways to tap into their home equity without touching their existing mortgage: the home equity line of credit (HELOC) and the home equity loan.
This makes both options especially attractive to those who locked in low mortgage rates in recent years—unlike a cash-out refinance, neither will replace your original loan.
This guide breaks down the differences, pros and cons, use cases, and how to decide which loan is best for you.
- Home equity loans and HELOCs let you tap into your home’s value without refinancing your current mortgage—a major plus if you’re happy with your current terms.
- A home equity loan provides a lump sum with fixed payments, ideal for one-time expenses. A HELOC offers revolving access to funds, which works well for ongoing or flexible costs.
- Both options typically have lower rates than credit cards or personal loans, but the right fit depends on how you plan to use the money and how much repayment flexibility you need.
HELOC vs. Home Equity Loan: What’s the Difference?
| Feature | HELOC | Home Equity Loan |
| Payout | As-needed draws from a credit line | Lump-sum payment |
| Rate Type | Usually variable | Fixed |
| Monthly Payments | Interest-only during draw; principal + interest in repayment | Fixed monthly principal + interest payments from day one |
| Best For | Ongoing or uncertain expenses | One-time expenses with a known cost |
A home equity loan is like a traditional installment loan: you receive a lump sum upfront and repay it over time with fixed monthly payments and a fixed interest rate.
A HELOC works more like a credit card with your house as collateral. You can borrow from it as needed during the “draw period” (usually 5–10 years), making interest-only payments.
After the draw period, HELOCs enter a repayment phase—often lasting 10 to 20 years—during which you pay both principal and interest. Some lenders may offer balloon payment options, so make sure you understand the structure before signing.
Both are considered second mortgages, meaning your current mortgage is left untouched, and your HELOC or home equity loan payments will be due in addition to your primary mortgage. This also means that failing to make payments on your HELOC or home equity loan could lead to damaged credit or foreclosure.
Qualifying for a HELOC or Home Equity Loan
To qualify for either loan, lenders typically look for:
- Sufficient home equity (usually 15–25% minimum remaining after loan)
- Good credit score (660+ is often accepted, but 700+ gets better rates)
- Stable income and low debt-to-income ratio (DTI)
Many lenders allow you to borrow up to 75%–90% of your home’s appraised value, minus your existing mortgage balance.
Example: If your home is worth $400,000 and your current mortgage is $250,000, and your lender allows 80% LTV, you may be able to borrow up to $70,000:
$400,000 home value x 80% max LTV = $320,000
$320,000 – $250,000 current mortgage balance = $70,000
Check out our HELOC and home equity loan calculators to see how much you might be able to borrow.
Closing Costs and Fees
Some lenders charge closing costs, annual fees, or early termination fees. Others waive these fees depending on the loan size or your credit profile—so it’s important to compare lenders carefully.
Reduced Equity
Keep in mind that borrowing against your home reduces your available equity, which may impact your ability to refinance or sell in the future.
HELOC vs. Home Equity Loan: Interest Rates
- Home Equity Loans: Fixed interest rate and monthly payment—ideal if you want predictability.
- HELOCs: Usually start with a lower variable rate, but your rate (and payment) can rise over time. Some lenders offer fixed-rate HELOCs or allow you to lock in part of your balance.
In general, both options offer lower rates than credit cards or unsecured personal loans because they’re backed by your home.
Pros and Cons of Each Option
Home Equity Loan
Pros:
- Fixed interest rate
- Predictable monthly payment
- Best for one-time costs like renovations or debt consolidation
Cons:
- Interest starts accruing immediately
- Less flexible—requires reapplying if you need more money later
HELOC
Pros:
- Borrow what you need, when you need it
- Only pay interest on the amount you draw
- Reusable credit line during the draw period (i.e. you can pay down your balance and re-borrow as needed)
Cons:
- Variable interest rate = unpredictable payments
- Potential payment shock when you enter the repayment period
- Easy to overspend if you don’t budget carefully
Best Uses for Each Loan Type
Renovations
- HELOC: Ideal if you have multiple projects or an uncertain timeline/budget.
- Home Equity Loan: Best if you have a fixed quote and want a set rate and payment.
Debt Consolidation
- Home Equity Loan: Typically preferred. It gives you a lump sum to pay off high-interest balances and a fixed repayment plan.
- HELOC: Can work—but variable rates and spending flexibility require discipline.
Down Payment for Another Home
- Home Equity Loan: Generally better because you know how much you need upfront.
- HELOC: Riskier due to potential payment changes, especially if your budget is tight.
HELOC vs. Home Equity Loan: Which Is Better?
It depends on what matters more to you:
- Want predictable payments and a one-time loan? → Choose a home equity loan.
- Want flexibility to borrow over time and can manage variable payments? → Go with a HELOC.
And don’t forget the big-picture trade-off: with a home equity loan, you’ll begin repayment immediately. With a HELOC, you can defer principal payments—but those payments will increase later.
FAQs
How much can I borrow?
Lenders generally allow borrowing up to 75–90% of your home’s appraised value, minus your existing mortgage. Most also require a minimum draw of $5,000–$10,000.
Are interest payments tax-deductible?
Yes—but only if funds are used to buy, build, or substantially improve the property securing the loan. Check with a tax advisor for specifics.
Are home equity loans amortized?
Yes. Home equity loans are fully amortized, meaning every payment includes interest and principal. HELOCs are usually interest-only during the draw period.
How do I determine my home’s value?
You can use online tools, request a comparative market analysis (CMA) from a real estate agent, or hire a professional appraiser for the most accurate estimate.
What Happens If You Sell Your Home?
If you sell your home before your home equity loan or HELOC is paid off, you’ll need to repay the outstanding balance in full at closing. Because these loans are secured by your property, they must be settled when the home is transferred to a new owner.
If you don’t have enough proceeds from the sale to pay off your remaining balances—including your primary mortgage and your home equity loan or HELOC—you may need to bring cash to the closing table.
Final Thoughts
Home equity loans and HELOCs can both help you access your home’s value—often at far better rates than unsecured loans or credit cards. Choosing between them depends on how much you need, how you want to repay it, and how much flexibility (or structure) you’re looking for.
Ready to get started? Start your application with Refi.com today.
