If you own a home and have built up equity, you have two main ways to tap that value: a home equity loan or a home equity line of credit (HELOC). Both let you borrow against your home, but they work very differently. Choosing the wrong one can cost you thousands of dollars in extra interest.
Here is how to decide which is right for your situation.
What Is a Home Equity Loan?
A home equity loan is a one-time lump-sum loan secured by your home. You receive all the money upfront and repay it over a fixed term (typically 5–30 years) at a fixed interest rate. Your monthly payment stays the same for the life of the loan.
Example: You borrow $50,000 at 7.5% for 10 years. Your monthly payment is approximately $594, and you pay a total of $71,280 over the life of the loan.
What Is a HELOC?
A home equity line of credit works like a credit card backed by your home. You get approved for a maximum credit limit and can draw on it as needed during the draw period (typically 10 years). You only pay interest on what you actually borrow. After the draw period ends, you enter the repayment period (typically 10–20 years) where you pay back principal plus interest.
Most HELOCs have variable interest rates tied to the prime rate, so your payment can change over time.
Home Equity Loan vs. HELOC: Key Differences
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Disbursement | Lump sum upfront | Draw as needed |
| Interest rate | Fixed | Variable (usually) |
| Monthly payment | Fixed, predictable | Variable, interest-only in draw period |
| Best for | One-time expenses | Ongoing or uncertain costs |
| Closing costs | Typically 2%–5% | Often lower or waived |
Current Rates in 2026
As of May 2026, average home equity loan rates are running between 7% and 9% for borrowers with good credit. HELOC rates are typically similar or slightly lower, but they adjust with the prime rate. When the Federal Reserve cuts rates, HELOCs become more attractive; when rates rise, fixed home equity loans provide more stability.
When to Choose a Home Equity Loan
Best for one-time, defined expenses
If you need a specific amount of money for a known project — a kitchen renovation, debt consolidation, or a major purchase — a home equity loan gives you all the money upfront at a fixed rate. You know exactly what you owe and when you will be done paying.
Best when you want payment certainty
The fixed rate and payment make budgeting simple. If interest rates rise after you borrow, you are protected. This is valuable in an uncertain rate environment.
Best use cases:
- Home renovation with a fixed budget
- Debt consolidation (pay off credit cards at lower interest)
- Major medical expenses
- Education costs with a fixed tuition amount
When to Choose a HELOC
Best for ongoing or uncertain expenses
If you are doing a multi-phase renovation and don’t know the exact cost, a HELOC lets you borrow only what you need at each stage. You pay interest only on the outstanding balance, which can save money compared to borrowing a lump sum upfront.
Best as a financial safety net
Many homeowners open a HELOC and keep it in reserve for emergencies. Since most HELOCs have no fee if you don’t use them (after the initial setup), it can function as a low-cost line of credit available when you need it.
Best use cases:
- Home renovation with uncertain costs
- Business expenses with variable cash needs
- Emergency fund backup
- Investment opportunities you want flexibility to act on
The Risks of Both Options
Both home equity loans and HELOCs use your home as collateral. If you fail to make payments, the lender can foreclose. This is a critical difference from personal loans or credit cards, where the worst case is damaged credit, not losing your house.
Only use these products for expenses that add value or solve real financial problems — not for discretionary spending or lifestyle inflation.
How Much Can You Borrow?
Most lenders allow you to borrow up to 80–85% of your home’s value minus your existing mortgage balance.
Example: Home value is $400,000. Mortgage balance is $250,000. You have $150,000 in equity. At 85% combined loan-to-value, you could borrow up to $90,000 ($400,000 × 85% − $250,000).
Tax Deductibility
Interest on home equity loans and HELOCs may be tax-deductible if the funds are used to “buy, build, or substantially improve” the home securing the loan. Interest on funds used for other purposes (like paying off credit cards or buying a car) is generally not deductible. Consult a tax professional for your specific situation.
Bottom Line
Choose a home equity loan if you need a specific lump sum and want predictable payments at a fixed rate. Choose a HELOC if you have ongoing or uncertain expenses and want the flexibility to borrow only what you need.
Either way, shop at least three lenders — your bank, a credit union, and an online lender — to compare rates and fees. Closing costs and rate differences can add up to thousands of dollars over the life of the loan.