Home equity loan vs HELOC: which fits your plans?

A home equity loan gives you a lump sum that you repay on a set schedule, while a home equity line of credit (HELOC) lets you borrow as you need money, up to a limit. Both let you borrow against the equity in your home, and both use the home as collateral.

The better fit depends on how much you need, when you need it and whether you’d rather have a steady payment or flexible access to cash. Here’s how the two compare on payments, costs, risks and taxes.

Key takeaways

• A home equity loan pays one lump sum, usually at a fixed rate, with equal payments that pay off the loan over its term.
• A HELOC works like a credit line. You can draw, repay and draw again during a draw period, and the rate is usually variable.
• When a HELOC’s draw period ends, your payment can rise sharply, and some plans require the whole balance at once.
• Both are usually second mortgages. If you can’t repay, you could lose your home.
• Interest is deductible only if you use the money to buy, build or substantially improve your home, and only if you itemize.

How a home equity loan and a HELOC differ

Lump sum vs. revolving credit

With a home equity loan, you get the full amount at closing and start repaying it right away. The rate is usually fixed, so your principal and interest payment stays the same until the loan is paid off. That makes it easy to budget for, but you pay interest on the whole amount from day one, even if you won’t spend it all at once.

A HELOC is an open-end line of credit. During the draw period, you can spend up to your credit limit whenever you want, usually with special checks or a card linked to the account. As you repay, the credit becomes available again. Some plans require a minimum amount each time you draw, such as $300, or require you to take an initial amount when the line is opened.

The two options side by side

Feature	Home equity loan	HELOC
How you get the money	One lump sum at closing	Draws as needed during the draw period, up to your limit
Interest rate	Usually fixed	Usually variable; some plans let you convert part of the balance to a fixed rate
Payments	Equal payments that pay off the loan over its term	Change with your balance and rate; may be interest-only during the draw period
Borrowing more later	Requires a new loan	Possible during the draw period if you have available credit
Biggest payment risk	Taking on a fixed payment you can’t sustain	Rising rates and a payment jump when repayment starts

What both options have in common

Both let you borrow against your equity, which is your home’s value minus what you owe on your mortgage. If you already have a mortgage, either one becomes a second mortgage with its own monthly payment. And because your home secures the debt, falling behind can lead to foreclosure.

If you sell your home, you’ll generally need to pay off either one in full, so up-front costs may not be worth it if you expect to move soon.

How payments work

Home equity loan payments

A home equity loan works like a standard installment loan. For example, if you borrow $30,000 at a fixed 9% rate for 10 years, your principal and interest payment is about $380 a month. Over the full term, you’d repay about $45,600, including roughly $15,600 in interest. (The rates in this article are examples, not current market rates.)

HELOC draw and repayment periods

A HELOC has two stages. During the draw period, which might last 10 years, you can borrow and repay as you like. Some plans set a minimum payment that includes some principal, while others let you pay interest only. Because the rate is usually variable, your payment can change even if you don’t borrow more.

When the draw period ends, you can no longer borrow and the repayment period begins. Your lender may set a schedule to repay the full balance, often over 10 to 20 years. Monthly payments are often significantly higher at this stage. Some plans instead require you to repay the entire balance at once, a lump sum known as a balloon payment. If you can’t pay it or refinance it, you could lose your home.

An example of HELOC payment shock

Say you draw $30,000 on a HELOC at 9% and make interest-only payments. Your payment during the draw period is $225 a month, but the balance never shrinks.

If the draw period ends with the full $30,000 still owed and you have 10 years to repay it at the same rate, the payment rises to about $380. If the rate had climbed to 11% by then, it would be about $413, nearly double what you were paying.

How HELOC variable rates work

A variable rate usually has two parts: an index and a margin. The index tracks interest rates in the wider economy. Common ones include the U.S. prime rate and the constant maturity Treasury rate. The margin is an extra percentage the lender adds on top.

Some lenders offer a low introductory rate for a short period, such as six months, before the regular variable rate kicks in. Ask how often the rate can change, whether there’s a cap on how high it can go, and whether you can lock part of your balance at a fixed rate. The fixed rate is usually higher than the variable rate but gives you a predictable payment.

How much you can borrow

Lenders generally let you borrow up to a percentage of your home’s appraised value, minus what you already owe. Each lender sets its own limit.

For example, suppose your home is worth $400,000 and you owe $250,000, so you have $150,000 in equity. If a lender caps total borrowing against the home at 80% of its value, that’s $320,000. Subtract your $250,000 mortgage, and the most you could borrow would be $70,000.

Equity alone doesn’t guarantee approval. Lenders also look at your credit history, your income and how much of your income already goes to debt payments, including the new payment.

Costs beyond the interest rate

Up-front costs

Some lenders waive some or all up-front costs. Others may charge:

• An appraisal fee for a formal estimate of your home’s value
• An application fee, which might not be refunded if you’re turned down
• Closing costs, including fees for attorneys, a title search, preparing and filing the mortgage, property and title insurance, and taxes

Ongoing HELOC fees

A HELOC can also carry fees while it’s open. Ask about annual or maintenance fees, transaction fees, inactivity fees and early termination fees. Some of these apply even when you aren’t using the line.

The CFPB suggests getting estimates from three lenders. Compare the annual percentage rate (APR), the index and margin, the length of the draw and repayment periods, and every fee, not just the advertised rate.

Disclosures and your right to cancel

HELOC lenders must disclose the APR, how the variable rate works, the payment terms, any draw requirements, annual fees and other charges. In general, a lender can’t charge a nonrefundable application fee until three days after you receive these disclosures. If the lender changes the terms before the line is opened, you can walk away and get your fees back, unless the only change is to the variable rate.

Both HELOCs and home equity loans secured by your main home generally come with a right of rescission. You can cancel for any reason until midnight of the third business day after closing, or after you receive the required notice and disclosures if that comes later. Tell the lender in writing. It must then cancel the loan and return the fees you paid.

Risks to weigh

Your home is on the line with either option. Beyond that, HELOCs carry some specific risks:

• Your credit line can shrink. Lenders can generally freeze or reduce a HELOC if your home’s value falls significantly or your finances get worse, leaving you without money you planned to use.
• Rates and payments can rise. A variable rate can push your payment up, and interest-only payments leave the full balance to repay later.
• Your plans may be limited. Some HELOC agreements prohibit renting out your home.

If your line is frozen or cut, ask the lender why. You might need to check your credit reports for errors, or ask whether the lender will accept a new appraisal. You can also shop for a line of credit elsewhere, though new fees may apply.

Is the interest tax-deductible?

Sometimes. Under IRS rules, you can deduct interest on a home equity loan or HELOC only to the extent you use the money to buy, build or substantially improve your home. Interest on money used for other purposes, such as paying off credit cards or covering tuition, isn’t deductible, no matter when you took out the loan.

The deduction also has limits. You can generally deduct mortgage interest on up to $750,000 of total home debt ($375,000 if married filing separately), with higher limits for debt taken on before December 16, 2017. A 2025 federal law made these rules permanent. You only benefit if you itemize deductions instead of taking the standard deduction.

Keep receipts that show how you spent the money, and check with a tax professional about your situation.

Which one fits your plans?

A known, one-time cost

A home equity loan may suit a single expense with a clear price, such as a contractor’s fixed bid for a new roof. You get the money at once and know your payment from the start. Build in a cushion for permits and surprises, because you can’t draw more from the same loan later.

Costs that come in stages

A HELOC may suit a project with bills spread over months, such as a remodel paid in phases. You draw money as invoices come due and pay interest only on what you’ve borrowed. Just make sure you can handle the payment if rates rise and when repayment begins.

Consolidating other debts

Using home equity to pay off higher-rate debt can lower your interest rate, but it turns unsecured debt, such as credit card balances, into debt secured by your home. A lower monthly payment can also come from stretching repayment over more years, which can raise the total interest you pay. It only helps if you avoid running the old balances back up.

Other ways to borrow

A cash-out refinance replaces your current mortgage with a bigger one and pays you the difference. You keep one mortgage payment, but closing costs are generally higher, it may take longer to pay off your mortgage, and the new rate could be higher than your current one.

A personal line of credit or personal loan doesn’t put your home at risk, but it typically carries a higher interest rate than borrowing secured by your home, and you’ll need solid credit to qualify.

If you’re having trouble paying your mortgage, talk to a HUD-approved housing counselor before borrowing against your home. You can reach one through the CFPB at (855) 411-2372.

Frequently asked questions

What is the main difference between a home equity loan and a HELOC?

A home equity loan pays you one lump sum that you repay in equal installments, usually at a fixed rate. A HELOC gives you a credit limit you can draw on as needed during a draw period, usually at a variable rate, and your payment changes with your balance.

Which costs less, a home equity loan or a HELOC?

It depends on the rates, fees and how you use the money. A HELOC can cost less if you draw only part of the limit, since you pay interest only on what you borrow. A home equity loan can cost less over time if variable rates rise. Compare APRs and fees from several lenders.

What happens when a HELOC’s draw period ends?

You can no longer borrow, and you start repaying the balance, often over 10 to 20 years. Your payment can rise sharply, especially if you were paying interest only. Some plans require the full balance as a balloon payment instead.

How do payments compare on $50,000?

At 9%, a $50,000 home equity loan repaid over 10 years costs about $633 a month in principal and interest. On a HELOC at the same rate, an interest-only payment on a fully drawn $50,000 would be about $375 a month, but the balance wouldn’t shrink, and the payment would rise once repayment begins.

Can you cancel a home equity loan or HELOC after signing?

Generally yes, if it’s secured by your main home. You have until midnight of the third business day after closing, or after you receive the required notice and disclosures if later, to cancel in writing. The lender must return the fees you paid.