If you have built equity in your home, you have two main ways to borrow against it: a home equity loan or a home equity line of credit (HELOC). Both let you tap the value in your home to fund home improvements, consolidate debt, cover emergencies, or other major expenses — but they work very differently and are suited to different situations.
What Is a Home Equity Loan?
A home equity loan (sometimes called a second mortgage) is a lump-sum loan secured by your home. You borrow a fixed amount, receive it all at once, and repay it over a fixed term (typically 5 to 30 years) at a fixed interest rate. Monthly payments are predictable and identical each month.
Home equity loans are ideal when you know exactly how much you need for a defined expense — a kitchen renovation, a new roof, or paying off a specific debt.
What Is a HELOC?
A home equity line of credit is a revolving credit line secured by your home, similar to a credit card. You are approved for a maximum credit limit and can borrow as much or as little as you need, when you need it, during the draw period (typically 10 years). Most HELOCs carry a variable interest rate that moves with the prime rate.
During the draw period, you typically pay interest only on what you have borrowed. After the draw period ends, the repayment period begins (usually 10 to 20 years), and you make principal and interest payments on the outstanding balance.
Key Differences: Home Equity Loan vs. HELOC
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Disbursement | Lump sum | Draw as needed |
| Interest rate | Fixed | Variable (usually) |
| Monthly payment | Fixed principal + interest | Interest-only during draw |
| Best for | One-time large expense | Ongoing or flexible needs |
| Risk | Payment shock if rate rises (N/A — fixed) | Rate can rise with prime rate |
How Much Can You Borrow?
Most lenders allow you to borrow up to 80% to 85% of your combined loan-to-value ratio. Here’s how to estimate:
- Determine your home’s current market value (an appraisal or recent comparable sales).
- Subtract your remaining mortgage balance.
- Multiply by 0.80 (or the lender’s maximum LTV).
Example: Home worth $500,000, mortgage balance $250,000. Equity = $250,000. Maximum borrowing at 80% LTV: $400,000 – $250,000 = $150,000 available.
Interest Rates in 2026
Home equity loan rates and HELOC rates are closely tied to the Federal Reserve’s benchmark rate. In 2026, both products are generally lower than unsecured personal loans and significantly lower than credit cards, making them attractive for large borrowing needs when you have sufficient equity. Shop at least three lenders — credit unions often offer more competitive rates than large banks.
Tax Deductibility
Interest on home equity loans and HELOCs may be tax-deductible if the funds are used to buy, build, or substantially improve your home (the property securing the loan). If you use the funds for personal expenses like debt consolidation or vacations, the interest is not deductible. Consult a tax professional for guidance on your situation.
The Risk: Your Home Is Collateral
Both products use your home as collateral. If you cannot repay, the lender can foreclose. This makes home equity borrowing more affordable than unsecured credit — but also more consequential if things go wrong. Only borrow what you can comfortably repay, and have a clear plan for the money.
Bottom Line
Choose a home equity loan if you need a fixed amount for a specific purpose and want predictable payments. Choose a HELOC if you want flexibility to borrow in phases — such as a multi-year renovation or an emergency fund backup. Both offer lower rates than personal loans or credit cards, but both put your home at risk. Compare offers from multiple lenders before choosing.