Home Equity Loans vs. HELOCs: What’s the Difference?
Tapping into your home’s equity? Learn the key differences between home equity loans and HELOCs — and which one might be right for your needs.
Your home can be a powerful financial tool — especially when you’ve built up enough equity to borrow against it.
Two common ways to tap into your home’s value are a home equity loan and a home equity line of credit (HELOC).
Both options can provide access to cash for things like renovations, debt consolidation, or major expenses — but they work very differently.
Let’s break it down.
What Is Home Equity?
Home equity is the portion of your home you truly own:
Home Equity = Home Value – Loan Balance
Example:
- Home is worth $400,000
- Mortgage balance is $250,000
- Your equity = $150,000
Lenders usually allow you to borrow up to 85% of your home’s value, minus what you still owe.
Home Equity Loan: Lump Sum Option
A home equity loan is a second mortgage that gives you a one-time lump sum payment.
- Fixed interest rate
- Fixed monthly payments
- Repayment terms typically 5–30 years
- Good for large, predictable expenses
Pros:
- Predictable budgeting
- Stable interest rate
- Great for one-time costs (e.g., remodeling, medical bills)
Cons:
- Less flexibility
- Interest starts accruing immediately
HELOC: Flexible Credit Line
A HELOC works more like a credit card:
- Revolving line of credit
- Variable interest rate
- Only pay interest on what you use
- Draw period (usually 10 years), then repayment period (10–20 years)
Pros:
- Flexible borrowing
- Lower initial payments
- Good for ongoing expenses (e.g., college, home repairs)
Cons:
- Variable rates = unpredictable payments
- Easy to overspend
- Risk of rate hikes
Side-by-Side Comparison
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Payment Type | Lump sum | Line of credit |
| Interest Rate | Fixed | Variable (usually) |
| Monthly Payments | Fixed | Varies with balance/rate |
| Repayment Begins | Immediately | After draw period |
| Use Case | One-time large expense | Ongoing/variable expenses |
Risks to Keep in Mind
Both options are secured by your home — if you can’t repay, you could face foreclosure.
Before borrowing:
- Make sure you can afford the payments
- Have a clear use for the funds
- Avoid using equity for risky investments or short-term wants
When to Use Each Option
Choose a Home Equity Loan if:
- You need a large amount upfront
- You prefer predictable payments
- You’re tackling a one-time project or purchase
🔁 Choose a HELOC if:
- You want access to funds over time
- Your expenses are ongoing or irregular
- You’re comfortable with changing interest rates
Final Thoughts
Both home equity loans and HELOCs let you unlock the value of your home — but they serve different purposes.
- Choose a home equity loan for stability and one-time needs
- Choose a HELOC for flexibility and ongoing access to cash
Before deciding, compare offers from multiple lenders and evaluate how each option fits with your financial goals and risk tolerance.
Your home is one of your most valuable assets — use it wisely.