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If you own a home, you can borrow against the equity you have built up. Two tools for this are a home equity loan and a HELOC. They both use your home as collateral, but they work very differently. Here is how to decide which is right for you in 2026.
Rates and figures as of May 2026.
What Is Home Equity?
Home equity is the portion of your home’s value that you own outright — your home’s current market value minus the amount you still owe on your mortgage.
Example: If your home is worth $450,000 and you owe $250,000 on your mortgage, you have $200,000 in home equity. That equity can be used as collateral to borrow money at lower interest rates than personal loans or credit cards.
Home Equity Loan vs HELOC: Side-by-Side Comparison
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| How you receive funds | Lump sum upfront | Draw as needed, up to your limit |
| Interest rate type | Fixed | Variable (usually) |
| Typical rates (2026) | 7.50% – 9.00% | 8.00% – 10.00% (variable) |
| Repayment | Fixed monthly payments over 5–30 years | Draw period (interest only) + repayment period |
| Best for | One-time, defined expenses | Ongoing, variable expenses |
| Closing costs | 2–5% of loan amount | Often lower; some lenders waive them |
| Risk if home value drops | Same — home is collateral | Lender may freeze or reduce your credit line |
What Is a Home Equity Loan?
A home equity loan is sometimes called a second mortgage. You borrow a fixed amount, receive it all at once, and repay it in equal monthly installments over the loan term (typically 5–30 years) at a fixed interest rate.
Pros
- Predictable fixed payment — easier to budget
- Lower rates than personal loans and credit cards
- Good for large, defined expenses like a home renovation or debt consolidation
Cons
- You receive the full amount immediately — interest starts accruing on the whole balance
- Closing costs of 2–5% reduce the effective amount you receive
- Less flexible than a HELOC if your needs change
What Is a HELOC?
A HELOC (Home Equity Line of Credit) is a revolving line of credit secured by your home. During the draw period (usually 5–10 years), you can borrow up to your credit limit, repay it, and borrow again — similar to a credit card.
After the draw period ends, you enter the repayment period (typically 10–20 years) where you can no longer draw new funds and must repay the principal plus interest.
Pros
- Borrow only what you need, when you need it — you only pay interest on what you draw
- Flexible for ongoing projects (multi-phase renovation, college expenses over several years)
- Some lenders offer zero closing costs
Cons
- Variable rate means monthly payments can increase if interest rates rise
- Temptation to overborrow during the draw period
- Lender can freeze or reduce your line if your home value falls or your financial situation changes
When to Choose a Home Equity Loan
- You have a specific, defined expense: a kitchen remodel with a known budget, debt consolidation for a set amount
- You prefer predictable monthly payments
- You are risk-averse about interest rate changes
- You want to borrow the full amount now and do not need flexibility
When to Choose a HELOC
- You have ongoing or uncertain costs: a multi-phase home renovation, college tuition over several years
- You want to keep a credit line available but only borrow as needed
- You can handle variable rate risk and may pay off the balance quickly
- You want a financial safety net for emergencies (though a dedicated emergency fund is better)
How to Qualify for a Home Equity Loan or HELOC
Lenders evaluate four main factors:
- Equity: You typically need to retain 15–20% equity in your home after borrowing
- Credit score: Most lenders require 620+ minimum; 720+ for best rates
- Debt-to-income ratio: Most lenders cap at 43% DTI — your total monthly debt payments divided by gross monthly income
- Stable income: Two years of employment history or consistent self-employment income
Are Home Equity Loans Tax Deductible?
The interest on a home equity loan or HELOC may be tax-deductible if the funds are used to buy, build, or substantially improve your home. If you use the money for other purposes (vacation, car, credit card payoff), the interest is generally not deductible. Consult a tax professional for your specific situation.
Key Takeaways
- Home equity loans give you a lump sum at a fixed rate — best for defined, one-time expenses
- HELOCs are flexible revolving credit lines at variable rates — best for ongoing or uncertain costs
- Both use your home as collateral — if you cannot repay, you risk foreclosure
- Rates in 2026 typically run 7.50–10.00% depending on credit and loan-to-value
- You need at least 15–20% equity retained after borrowing to qualify at most lenders