HELOC vs Home Equity Loan
Complete guide to choosing between a line of credit and a traditional loan
Quick Comparison
At-a-glance differences between HELOCs and home equity loans
| Feature | HELOC (Line of Credit) | Home Equity Loan |
|---|---|---|
| Interest Rate | Variable (adjusts with market) | Fixed (stays the same) |
| How You Receive Funds | Draw as needed (like credit card) | Lump sum upfront |
| Monthly Payments | Interest-only during draw period | Principal + interest from day one |
| Best For | Ongoing projects, flexibility | One-time expenses, predictability |
| Rate Risk | Higher (rates can increase) | Lower (rate locked in) |
| Flexibility | Higher (access funds anytime) | Lower (one-time funding) |
HELOC (Home Equity Line of Credit)
A HELOC functions like a credit card secured by your home's equity. You're approved for a maximum credit limit and can draw funds as needed during the draw period (typically 10 years).
How HELOCs Work
Two-Phase Structure:
HELOC Advantages
- ✓Flexibility: Draw funds only when needed
- ✓Lower initial payments: Interest-only during draw period
- ✓Pay interest only on what you use: Not the full credit limit
- ✓Revolving credit: Can re-borrow repaid amounts during draw period
- ✓Access methods: Online, checks, debit card
HELOC Disadvantages
- ✗Variable rates: Payments can increase if rates rise
- ✗Payment shock: Higher payments when repayment period begins
- ✗Temptation to overspend: Easy access can lead to overuse
- ✗Rate uncertainty: Hard to predict total cost
Home Equity Loan
A home equity loan provides a lump sum of money upfront with a fixed interest rate and predictable monthly payments. It's also called a "second mortgage."
How Home Equity Loans Work
Simple Structure:
Home Equity Loan Advantages
- ✓Fixed rate: Rate and payments never change
- ✓Predictable payments: Easy to budget around
- ✓Lump sum funding: Get all money upfront
- ✓Protection from rate increases: Locked-in rate
- ✓Forced repayment: Built-in discipline to pay down debt
Home Equity Loan Disadvantages
- ✗Less flexibility: Can't re-borrow repaid amounts
- ✗Higher initial payments: Principal + interest from day one
- ✗Pay interest on full amount: Even if you don't need it all immediately
- ✗Need new loan for more funds: Must reapply and requalify
When to Choose Each Option
Choose a HELOC If...
Ongoing Home Renovation
Drawing funds as work progresses, paying contractors in phases over months or years.
College Tuition Payments
Drawing funds each semester as tuition bills come due over multiple years.
Emergency Fund Backup
Having access to funds for unexpected expenses without paying interest until used.
Variable Income
Self-employed or commission-based income where flexibility in payments is valuable.
Investment Opportunities
Real estate investments or other opportunities where timing and flexibility matter.
Choose a Home Equity Loan If...
Debt Consolidation
Paying off multiple high-interest debts with one fixed-rate payment.
Large One-Time Purchase
Buying a car, boat, or other major purchase requiring immediate full payment.
Predictable Budget Needs
When you need consistent monthly payments for easier budgeting and planning.
Major Home Improvement
Kitchen or bathroom remodel with fixed contractor quotes and upfront costs.
Interest Rate Protection
When rates are low and you want to lock in that rate for the entire loan term.
Rate and Cost Comparison
Interest Rates
HELOC Rates
Home Equity Loan Rates
Rate Considerations
- • HELOCs often start with lower rates but can increase
- • Home equity loans typically have slightly higher initial rates
- • Your credit score and LTV ratio affect both options
- • Some HELOCs offer introductory rate discounts
Closing Costs & Fees
| Fee Type | HELOC | Home Equity Loan |
|---|---|---|
| Appraisal | $300-600 | $300-600 |
| Application Fee | $0-500 | $0-500 |
| Origination Fee | 0-2% | 0-3% |
| Annual Fee | $50-100 | $0 |
| Early Closure | $300-500 | $0 |
Total Cost Estimate
Payment Examples
$50,000 Loan Comparison
Assuming 8% initial rate for both options
HELOC Payment Schedule
Home Equity Loan Payment
Important Notes
- • HELOC payments can increase if interest rates rise
- • HELOC example assumes you use the full $50,000 immediately
- • Actual payments depend on your specific rate and terms
- • Interest may be tax-deductible if used for home improvements
Decision Framework
Answer These Questions to Help Decide
1. How will you use the funds?
2. How important is payment predictability?
3. What's your interest rate outlook?
4. Do you need spending flexibility?
5. How's your financial discipline?
Quick Decision Guide
HELOC vs Home Equity Loan FAQ
Common questions about choosing between HELOCs and home equity loans
Ready to Apply?
Compare rates and terms from multiple lenders