If you own a home and have built up equity, you have two primary ways to tap it: a home equity loan and a home equity line of credit (HELOC). Both let you borrow against your home at lower interest rates than most other loans, but they work very differently.
Choosing the wrong one for your situation can cost you money or leave you without the flexibility you need. Here is how to decide.
How Home Equity Loans Work
A home equity loan gives you a lump sum of money at a fixed interest rate. You repay it over a set term — typically 5 to 30 years — with a consistent monthly payment that does not change.
Think of it like a second mortgage. You know exactly what you are borrowing, what your rate is, and what your payment will be every month. That predictability is the main appeal.
Best for:
- One-time expenses with a known cost: home renovations with a fixed budget, debt consolidation, paying for a specific large expense
- Borrowers who prefer fixed payments and want to avoid rate risk
- Situations where you need all the money upfront
How HELOCs Work
A HELOC is a revolving line of credit, similar to a credit card but secured by your home. You are approved for a credit limit and you can draw from it as needed during a draw period, typically 10 years. You only pay interest on what you actually borrow.
After the draw period, you enter a repayment period (usually 10 to 20 years) where you can no longer draw funds and must repay the balance. Most HELOCs carry variable interest rates tied to the prime rate, which means your rate can change as market conditions shift.
Best for:
- Ongoing or unpredictable expenses: a multi-phase renovation, funding a business, college tuition paid semester by semester
- Borrowers who want to draw only what they need and pay interest on that amount
- Situations where you want access to credit without necessarily using all of it
Key Differences Side by Side
- Home Equity Loan: Lump sum disbursement, fixed interest rate, fixed monthly payment
- HELOC: Draw as needed, usually variable rate, interest-only during draw period
How Much Can You Borrow?
Both products allow you to borrow based on your home equity. Most lenders allow you to borrow up to 80% to 85% of your combined loan-to-value (CLTV) ratio.
Example: Your home is worth $400,000. You owe $200,000 on your mortgage. At 80% CLTV, you could potentially borrow up to $120,000 ($400,000 x 80% = $320,000, minus the $200,000 you owe).
Interest Rates in 2026
Home equity loan rates in 2026 are meaningfully lower than credit card rates and personal loan rates for most borrowers with good credit. Because the loan is secured by your home, lenders take on less risk, which translates to lower rates for you.
However, the risk is real: if you cannot make payments, the lender can foreclose on your home. Never borrow more than you are confident you can repay.
Tax Deductibility
Interest paid on home equity loans and HELOCs may be tax-deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. Using equity to pay off credit cards or fund vacations does not qualify for the deduction. Consult a tax professional for your specific situation.
Which One Should You Choose?
The choice comes down to two questions:
- Do you know exactly how much you need? If yes, a home equity loan’s lump sum and fixed rate offer simplicity. If your expenses are uncertain or spread over time, a HELOC gives you flexibility.
- Can you handle rate variability? If interest rates rise significantly, a HELOC payment can increase. If you prefer to know your payment will not change, the fixed-rate home equity loan wins.
Bottom Line
Both home equity loans and HELOCs can be powerful tools when used responsibly. Use a home equity loan for known, one-time costs where you want payment certainty. Use a HELOC for ongoing or uncertain expenses where you want flexibility. Either way, shop multiple lenders for the best rate and terms — rates can vary significantly from one institution to the next.