Home equity line of credit (HELOC) vs. home equity loan: What’s the difference, and which is right for you?

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You can borrow against the equity you’ve built in your house, using tools such as home equity loans and home equity lines of credit (HELOCs). Not to be confused with refinancing, these are both types of second mortgages that you take out in addition to your original mortgage loan. So, how do you choose between the two?

Home equity is the amount of your home’s value that you actually own. Equity increases every time you pay down your mortgage or home values rise in your area.

You can profit from your home equity when you sell your house, but you can also borrow from it while you still live in it — as long as you’ve accrued enough.

To calculate the equity in your home, you’ll need two numbers: your mortgage balance and the value of your house.

Simply take your home’s value and subtract your existing mortgage balance. For example, if your house is worth $300,000, and your outstanding balance is $150,000, you have $150,000 in equity.

Take note, however, that most lenders won’t let you borrow 100% of that. Typically, lenders will loan you between 80% and 85% of your home’s value, minus your current loan balance.

Here’s an example, using an 85% combined loan-to-value (LTV) limit on a $300,000 home with a $150,000 mortgage balance.

The calculation:

$300,000 home value x 0.85 = $255,000

$255,000 – $150,000 = $105,000

In the above example, you could potentially borrow up to $105,000 using a home equity loan or HELOC.

A home equity line of credit (HELOC) and a home equity loan are popular ways to access equity. However, there are key differences to note.

A HELOC is a revolving credit account that allows you to make on-demand withdrawals from an approved balance limit. You draw from the line of credit as you wish — throughout what’s called the “draw” period — and repay it over time during the “repayment period.”

It is similar to a credit card, but because it is guaranteed by your home, it’s likely to have a lower interest rate than most credit cards.

With HELOCs, you only pay interest on what you actually withdraw from the credit line. Even better, the interest you pay on a HELOC can be tax-deductible if you use the proceeds to “buy, build, or substantially improve” your home, according to the IRS.

HELOCs are like credit cards in another way: They generally have variable interest rates that go up and down as time passes. Their minimum payments also change. That’s because, in addition to the changing interest rate, you may draw from the line of credit in various amounts over time, so your balance and your interest rate are likely to vary too.

A HELOC will have a draw period (generally 10 years) and a repayment period (typically 20 years). You may be given the option to pay only interest on the current balance during the draw period. During the repayment period, principal and interest payments will kick in.

Tip: Some HELOC lenders allow you to convert at least a portion of the remaining balance on a variable-rate HELOC to a fixed interest rate. This can help you better budget for your payments and control your costs.

HELOCs are suitable for cash needs that change over time. That might include unexpected expenses, home improvements you tackle one at a time, or medical bills such as out-of-pocket costs not covered by insurance.

It also could be a good time for you to get a HELOC if you have lived in your house for several years and have acquired a significant amount of equity.

You can draw from the credit limit as needed over an extended period of time.
You may make interest-only payments during the draw period.
Lenders might offer an optional conversion to a fixed interest rate.
If interest rates are falling, your payment could be reduced.
Interest paid may be tax-deductible.
You only pay interest on the amount you withdraw — not the full credit line.
They may not have closing costs, depending on the lender.

Not all lenders offer HELOCs.
Your home is held as security for the amount you borrow, so you can lose it to foreclosure if you don’t make your payments.
Monthly payments will increase when principal payments are due.
A variable interest rate means unpredictable payments — and higher payments if interest rates rise.
A lender can shut off credit lines at their discretion.
Annual or early closure fees may apply.

Learn how to get a HELOC in 6 simple steps.

A home equity loan, or HEL, is a second mortgage where a portion of your home’s equity is delivered to you in a lump sum.

These generally have a fixed interest rate, and as with your primary mortgage, you pay the loan amount off over several years.

Like a HELOC, the interest you pay on home equity loans may be tax-deductible so long as you use the funds to improve your house.

In the example above, rather than giving you access to draw on that $105,000 line of credit, the home equity loan lender would offer up to $105,000 in a lump sum. You could then use the funds however you wish, paying the balance back — plus interest — in fixed monthly payments for the entire loan term.

Home equity loan terms generally range from five to 30 years.

Home equity loans may be appropriate if you have a significant known expense coming up — such as major home renovations or repairs — or to consolidate debt, as home equity products tend to have lower rates than credit cards, personal loans, and other consumer borrowing products.

Tip: Remember, your home is used as collateral for a home equity loan, so paying off unsecured debt, like credit cards, with a home equity loan is probably only a good idea if you’re absolutely sure you can make your payments. If you can’t, you might lose your home to foreclosure.

You get a large lump sum of money you can spend as you like.
A fixed interest rate means your monthly payment won’t change.
Interest paid may be tax-deductible.
Rates may be lower than on other borrowing products, like credit cards and personal loans.

Repayment begins shortly after the lump sum is issued.
Your home is held as security for the loan, so if you don’t make your payments, you could lose it to foreclosure.
You’ll pay interest on the entire loan amount, even if you don’t spend it all.
Home equity loan closing costs may be higher than for a HELOC.

It may be easier to qualify for a home equity loan. The primary reason is that HELOCs are adjustable-rate products, while HELs are fixed-rate, according to Karri Noble, senior vice president with loanDepot.

Lenders add a qualifying layer to adjustable-rate products to account for the possibility that the interest rate may rise. “We would want to make sure the borrower could still qualify for the payment,” Noble said. “And it’s actually no different than any other type of adjustable-rate loan.”

Often, a borrower must qualify at an interest rate 2% above the initial rate on an adjustable-rate loan product, such as a HELOC.

She provided two examples and a chart:

A lender offering an adjustable-rate HELOC may qualify you on the entire amount you are approved for (such as $100,000), plus the amount of the monthly payment.
A lender offering a fixed-rate home equity loan might consider only the monthly payment when evaluating your eligibility.

Specific loan requirements vary by lender, but generally, home equity loans and HELOCs require a borrower to:

Have a FICO credit score of 680 or higher.
Show a history of good credit and proof of sufficient monthly income.
Obtain an appraisal to determine the current market value of the home.
Have at least 15% to 20% equity in the house.
Have a debt-to-income ratio of 43% or less.
Show proof of in-force homeowners insurance.

Lenders may charge origination fees and other closing costs on a HELOC or home equity loan. When shopping for yours, make sure to ask about all possible application fees, annual charges, early account closure fees, and other one-time or ongoing expenses. Shop multiple lenders to find the lowest interest rate and the fewest fees.

Whether a HELOC or home equity loan is the right choice largely depends on your goals and budget. If you need access to a large amount of cash soon — for a known expense or unexpected repair, for instance — then a home equity loan is likely the best choice. And if a fixed, stable payment that stays the same for the long haul is important to you, a home equity loan could be the best choice.

If, on the other hand, you want to have cash to pull from for many years to come — and you have the financial flexibility to manage payments that can increase over time — then a HELOC may be the better choice.

If you’re still not sure which to choose, talk to a mortgage professional. They can help you run the numbers for both options and see which suits your household best.

If HELOCs or home equity loans aren’t an option, you may be able to explore these alternatives.

Another way to tap the equity in your home is with cash-out refinancing. This is when you replace your current mortgage with a larger one, getting the difference between those two balances back in cash.

This ensures you have just one monthly payment, rather than the two a home equity loan or HELOC would come with.

You may need more than 20% equity in your home for a cash-out refinance, though some refinance programs offer lower equity requirements. You’ll also want to be sure that prevailing interest rates are close to or below your current mortgage rate, or you could end up paying much more in interest — both monthly and over the long haul.

Also, keep in mind that interest rates on cash-out refinances are often higher than those on traditional refinances. Closing costs on a cash-out refinance are often higher than for HELOCs and home equity loans, too.

Dig deeper:

Personal loans let you borrow a lump sum for just about any purpose, then repay the money at a fixed interest rate over several years.

Rates on personal loans are usually higher than those for home equity loans or HELOCs, and you may not be able to borrow as much. But this could be a viable option if you’re consolidating high-interest credit card debt.

Many personal loans are unsecured, meaning they don’t require collateral. This can be less risky than equity loans secured by your home. However, missed payments on a personal loan can still affect your credit score.

A reverse mortgage is an equity loan for older homeowners, usually age 62 or older, that typically doesn’t have to be repaid as long as you live in the home.

You can receive funds as a lump sum, line of credit, or in monthly payments. Interest and fees will continue to accrue until the balance is repaid, usually once you sell, move, or pass away.

Reverse mortgages can be complex and costly over time, so it’s important to understand interest rates, fees, and other terms before you commit.

If you’re still not sure which to choose, talk to a mortgage professional. They can help you run the numbers for both options and see which suits your household best.

No, home equity loans and HELOCs are two different types of second mortgages that help you tap your home equity. A home equity loan gives you money in one lump sum, and a HELOC is a line of credit you can withdraw from when you need money (sort of like a credit card).

Both home equity loans and home equity lines of credit (HELOCs) are types of second mortgages. With a home equity loan, you receive the borrowed money in one lump sum. A HELOC is a line of credit, meaning you can borrow money as you need it — and only pay interest on the funds you actually end up using. Although there are exceptions, a home equity loan usually has a fixed interest rate, and a HELOC typically has a variable rate.

If you take out a $50,000 home equity loan, you will receive all of the money at once and pay interest on the full amount. With a HELOC, you can withdraw money as needed. For example, you may take out $10,000 to remodel your kitchen, then $20,000 to replace your roof, and never touch the remaining $20,000. You only pay interest on the money you actually withdraw and use.

A home equity loan is better if you want a large lump sum of cash all at once or a fixed, predictable monthly payment for the long haul. HELOCs are a better choice if you need access to money over an extended period and can manage fluctuating interest rates and variable monthly payments.

Laura Grace Tarpley edited this article.