If you’re a homeowner looking to tap into your home’s value for cash, you’ve probably come across two popular options: a HELOC (Home Equity Line of Credit) and a Home Equity Loan.
While both allow you to borrow against your home’s equity, they function very differently. Choosing the right one depends on your financial goals, borrowing habits, and how you plan to use the funds.
In this article, we’ll break down how HELOCs and Home Equity Loans work, their pros and cons, key differences, and how to decide which is best for your needs.
What Is Home Equity?
Before we compare loan types, let’s clarify what home equity actually means.
Home equity is the difference between your home’s current market value and the balance you still owe on your mortgage.
Example:
Market value of your home: $400,000
Remaining mortgage balance: $250,000
Home equity = $150,000
This equity is an asset you can borrow against using financial products like a HELOC or Home Equity Loan.
What Is a Home Equity Loan?
A Home Equity Loan is a lump sum loan secured by your home’s equity. It functions much like a traditional loan.
Key features:
You borrow a fixed amount upfront.
Fixed interest rate.
Fixed monthly payments over a set term (usually 5 to 30 years).
Ideal for one-time expenses.
Common uses:
Home renovations
Debt consolidation
Medical bills
College tuition
What Is a HELOC (Home Equity Line of Credit)?
A HELOC works more like a credit card. It’s a revolving line of credit secured by your home that you can draw from as needed.
Key features:
You get a credit limit (based on your equity).
Variable interest rate.
Draw period (usually 10 years), followed by a repayment period (10–20 years).
You only pay interest on the amount you borrow.
Flexible access through checks, credit card, or bank transfers.
Common uses:
Ongoing home improvements
Emergency fund access
Educational expenses
Cash flow flexibility for small business owners
HELOC vs Home Equity Loan: Side-by-Side Comparison
Pros and Cons of a Home Equity Loan
✅ Pros:
Predictable payments: Same amount every month.
Fixed interest rate: No surprises with rising rates.
Good for budgeting: Especially if you know how much you need.
❌ Cons:
Less flexibility: You receive one lump sum.
You pay interest on the full amount, even if you don’t use it all.
Closing costs: Typically 2%–5% of the loan amount.
Pros and Cons of a HELOC
✅ Pros:
Flexible borrowing: Use only what you need, when you need it.
Interest-only payments during draw period: Lower initial payments.
Reusability: You can borrow, repay, and borrow again (like a credit card).
❌ Cons:
Variable interest rate: Monthly payments can increase.
Temptation to overspend: Because of easy access to funds.
Balloon payments: Some HELOCs have large payments due at the end.
When Should You Choose a Home Equity Loan?
A Home Equity Loan may be the better choice if:
You have a specific, one-time expense (e.g., roof replacement, tuition).
You want predictable payments and a fixed interest rate.
You’re consolidating debt and want to lock in a stable rate.
You prefer a clear payoff timeline.
Ideal for: Borrowers who value stability and know exactly how much they need.
When Should You Choose a HELOC?
A HELOC is a great choice when:
You need flexibility to borrow over time (e.g., phased renovations).
You want to use it as a backup or emergency fund.
Your income fluctuates and you need cash flow management.
You’re not sure how much money you’ll actually use.
Ideal for: Ongoing projects, uncertain expenses, and borrowers comfortable managing variable rates.
How to Qualify for a HELOC or Home Equity Loan
Requirements vary by lender, but generally include:
At least 15%–20% equity in your home
Credit score of 620+ (700+ for best rates)
Debt-to-income ratio (DTI) under 43%
Reliable income and employment history
Proof of homeownership and property insurance
Pro tip: The better your credit and DTI, the higher your approval chances and the lower your interest rate.
Costs to Consider
Both HELOCs and Home Equity Loans may come with:
Closing costs: 2%–5% of the amount borrowed
Appraisal fees: $300–$700 (sometimes waived)
Annual fees: Often $50–$100 for HELOCs
Prepayment penalties: Some loans charge fees for early payoff
Always ask your lender for a Loan Estimate before agreeing to terms.
HELOC and Home Equity Loan Alternatives
Not sure if borrowing against your home is right for you? Consider these alternatives:
🔹 Personal Loan
No collateral required
Faster approval, higher interest
🔹 Cash-Out Refinance
Replace your mortgage with a new one and withdraw equity
Might lower or raise your overall interest rate
🔹 Credit Cards
For small, short-term expenses
Higher interest rates unless you qualify for 0% intro APR
Tax Considerations
Interest on a HELOC or Home Equity Loan may be tax-deductible, but only if the loan is used to buy, build, or substantially improve your home.
Check IRS Publication 936 or consult a tax advisor for personalized guidance.
How Much Can You Borrow?
Most lenders allow you to borrow up to 85% of your home’s value, minus your existing mortgage balance.
Example:
Home value: $400,000
85% of value = $340,000
Mortgage balance = $250,000
Available equity to borrow = $90,000
Final Thoughts: Which One Is Right for You?
Choosing between a HELOC and a Home Equity Loan comes down to your financial needs, spending habits, and comfort with variable rates.
Choose a Home Equity Loan if:
You need a lump sum
You prefer fixed payments
You’re funding a one-time, large expense
Choose a HELOC if:
You want flexibility over time
You’re unsure how much you’ll need
You’re comfortable with changing rates
Both can be smart ways to use your home’s value—but only if used responsibly.
Next Steps
✅ Check your home equity
✅ Compare lenders and rates
✅ Get pre-approved to understand your limits
✅ Use a loan calculator to model payments
✅ Consult a financial advisor if you’re unsure