Both a HELOC and a home equity loan let you borrow against the equity in your home, but they work differently and suit different situations. Choosing between them comes down to whether you need money in one lump sum or as an ongoing credit line, and whether you want a fixed payment or flexible draws.
How a home equity loan works
A home equity loan is a one-time lump sum loan secured by your home. You borrow a specific amount, receive it at closing, and repay it over a fixed term at a fixed interest rate. The monthly payment never changes, which makes budgeting straightforward. Home equity loans work best for a defined, single expense: a full kitchen renovation with a known budget, paying off a specific debt, or funding a down payment on a second property.
How a HELOC works
A HELOC is a revolving credit line secured by your home. You are approved for a maximum credit limit and draw from it as needed during the draw period (typically 5-10 years), making interest-only payments on what you have borrowed. After the draw period, the line closes and any outstanding balance converts to a repayment phase. HELOC rates are variable, tied to the prime rate plus a margin. HELOCs work best for ongoing or phased expenses where the total is not known in advance.
Key differences
Disbursement: Home equity loan = one lump sum at closing. HELOC = draw as needed up to the limit.
Interest rate: Home equity loan = fixed. HELOC = variable, moves with prime rate.
Monthly payment: Home equity loan = fixed from day one. HELOC = interest-only during draw period, then installment payment.
Best for: Home equity loan = single defined expense. HELOC = ongoing or phased expenses requiring flexibility.
Both use your home as collateral
This point deserves emphasis: both a HELOC and a home equity loan are secured by your house. Defaulting on either puts your home at risk of foreclosure. This is a fundamentally different risk profile than unsecured debt. Using home equity to consolidate unsecured debt (credit cards, personal loans) converts that debt from unsecured to secured — increasing the risk to your most important asset. That does not make it never the right move, but the risk is worth naming explicitly before proceeding.
How much can you borrow?
Most lenders allow borrowing up to 80-85% of your home's appraised value, minus outstanding mortgage balance. On a $500,000 home with a $300,000 mortgage, that is roughly $100,000-$125,000 in available equity. Some lenders go to 90%, typically at higher rates.
Frequently asked questions
Is the interest tax-deductible?
Under current IRS rules, interest is deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan. Using either product to consolidate credit card debt or fund other expenses is not deductible. Confirm your situation with a tax professional.
Which has lower rates?
HELOCs typically have lower starting rates than home equity loans because they are variable. In a rising rate environment, that variable rate can exceed the home equity loan's fixed rate relatively quickly. In a stable or falling rate environment, the HELOC often wins on cost.
Good places to double-check
Review rates, fees, draw periods, repayment terms, and whether the rate can change. Lender disclosures matter more than the short product description.