Complete Guide to HELOC vs Home Equity Loan
Learn the key differences between HELOCs and home equity loans, including rates, terms, and when to use each option.
Quick Summary
HELOC: Revolving line of credit with variable rates, best for ongoing projects or uncertain funding needs.
Home Equity Loan: Fixed-rate lump sum loan, best for one-time expenses with known costs.
What's the Difference?
Both HELOCs and home equity loans allow you to borrow against your home's equity, but they work very differently. Understanding these differences is crucial for making the right financial decision.
HELOC (Home Equity Line of Credit)
A HELOC works like a credit card secured by your home. You get approved for a maximum credit limit, and you can draw funds as needed during the draw period (usually 10 years). You only pay interest on the amount you've actually borrowed.
Home Equity Loan
A home equity loan is a traditional installment loan. You receive the full loan amount at closing and make fixed monthly payments of principal and interest over the loan term (typically 5-30 years).
Side-by-Side Comparison
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Interest Rate | Variable (typically lower initially) | Fixed (typically higher) |
| Payment Structure | Interest-only during draw period | Principal + interest from day one |
| Access to Funds | Line of credit (use as needed) | Lump sum at closing |
| Closing Costs | Lower (often waived) | Higher (2-5% of loan amount) |
| Flexibility | High (revolving credit) | Low (fixed amount) |
| Risk | Rate can increase | Rate locked in |
HELOC Advantages
- Flexible access to funds as needed
- Pay interest only on what you use
- Variable rates often start lower
- No closing costs on unused funds
- Can be used for any purpose
Home Equity Loan Advantages
- Fixed interest rate and payment
- Predictable monthly payments
- No annual fees typically
- Cannot be frozen by lender
- Simpler to understand
When to Choose a HELOC
- You need funds for ongoing projects (home renovations, education)
- You're unsure of the exact amount you'll need
- You want flexibility to pay down and re-borrow
- You can handle variable interest rates
- You want to minimize upfront costs
When to Choose a Home Equity Loan
- You have a specific, one-time expense
- You want predictable monthly payments
- You prefer fixed interest rates
- You need the full amount immediately
- You want to avoid the temptation to overspend
Important Considerations
- • Both loans use your home as collateral - defaulting could result in foreclosure
- • Interest may be tax-deductible if used for home improvements (consult a tax advisor)
- • Lenders may freeze or reduce HELOC limits during economic downturns
- • Consider your ability to make payments if your financial situation changes