If you have equity in your home, two main options let you tap it: a HELOC (home equity line of credit) and a home equity loan. Both use your home as collateral. But they work differently, and the wrong choice can cost you money. This guide breaks down the key differences and tells you exactly which one to choose for your situation.
HELOC vs Home Equity Loan: Key Differences
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Rate type | Variable (tied to prime rate) | Fixed |
| Disbursement | Draw as needed, up to credit limit | Lump sum upfront |
| Repayment | Interest only during draw period, then principal + interest | Fixed monthly payment from day 1 |
| Draw period | Typically 10 years | None (one-time disbursement) |
| Best for | Ongoing costs, uncertain amounts | One-time large expense |
| Current rates (2026) | 8.00%–9.50% (variable) | 7.50%–9.00% (fixed) |
| Closing costs | Low–moderate ($0–$500) | Moderate ($500–$2,000) |
What Is a HELOC?
A HELOC works like a credit card secured by your home. You’re approved for a credit limit — say, $80,000 — and you can draw from it whenever you need money during the draw period (usually 10 years). You only pay interest on what you’ve actually borrowed, not the full limit.
After the draw period ends, the repayment period begins (typically 20 years), and you pay both principal and interest on the outstanding balance.
The rate is variable — it moves with the prime rate. If rates go up, your payment goes up. If rates fall, your payment falls.
Read our full guide on how HELOCs work for a deeper breakdown of the mechanics.
What Is a Home Equity Loan?
A home equity loan is a second mortgage. You borrow a fixed amount, receive it all at once, and repay it over a fixed term (usually 5–30 years) at a fixed interest rate. Your monthly payment never changes.
Because the rate is fixed, home equity loans are more predictable. You know exactly what you owe each month from day one.
When a HELOC Makes More Sense
- Home renovation with uncertain costs. You can draw what you need as costs come in, rather than borrowing too much upfront.
- Ongoing expenses. Paying for a child’s college tuition over four years — draw each semester rather than borrowing four years of tuition at once.
- You expect rates to fall. If variable rates drop during your draw period, your interest costs drop too.
- You want maximum flexibility. You can pay down the balance and borrow again during the draw period.
When a Home Equity Loan Makes More Sense
- You know exactly what you need. Paying off a specific debt, buying a car, or funding a single large expense with a known price.
- You want payment certainty. Fixed rate means fixed payment — easier to budget around.
- Rates are expected to rise. Locking in a fixed rate today protects you from future increases.
- Debt consolidation. Rolling high-interest credit card debt into a fixed home equity loan with a clear payoff timeline.
How Much Can You Borrow?
Most lenders cap home equity borrowing at 80%–85% of your home’s value, minus your existing mortgage balance.
Example: Home worth $400,000. Mortgage balance: $250,000.
- 80% of home value: $320,000
- Minus mortgage: $250,000
- Maximum equity you can borrow: $70,000
The Risk: Your Home Is Collateral
Both products use your home as collateral. If you default, you can lose the house. This is a fundamentally different risk than credit card debt or personal loans. Only borrow against home equity for purposes that genuinely improve your financial position (home improvements that add value, high-interest debt consolidation) rather than discretionary spending.
Finding the Best HELOC or Home Equity Loan
Compare offers from at least three lenders. Credit unions often offer competitive rates. Online lenders like Figure, Spring EQ, and Discover Home Loans are worth comparing alongside your current bank. Our best HELOC lenders guide lists the top options with current rates.
Bottom Line
HELOC for flexibility. Home equity loan for certainty. The best choice depends entirely on how you plan to use the money and your comfort with variable rates. Either way, both products are significantly cheaper than personal loans or credit cards — which is why they’re worth considering for major expenses.