HELOC vs Home Equity Loan
Both HELOCs and home equity loans let you borrow against your home's equity, but they work very differently. Here's how to choose the right option for your needs.
HELOC (Line of Credit)
Best For:
Ongoing expenses, uncertain costs, emergency fund, home improvements
Home Equity Loan
Best For:
Known expenses, debt consolidation, large purchases, predictable budgeting
Side-by-Side Comparison
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Interest Rate | Variable (typically starts lower) | Fixed (stays the same) |
| Monthly Payment | Interest-only during draw period | Fixed principal + interest |
| Access to Funds | Borrow as needed up to limit | Lump sum at closing |
| Payment Predictability | Payments can change | Same payment every month |
| Rate Risk | Rates can increase | No rate risk |
| Closing Costs | Often lower or waived | Typically 2-5% of loan amount |
| Repayment Period | 10-year draw + 10-20 year repay | 5-30 years |
Which Should You Choose?
The best choice depends on your specific situation. Here are common scenarios and our recommendations:
Home Renovations with Uncertain Costs
Kitchen remodel, bathroom upgrade, or major home improvements where costs may vary
Draw funds as needed, only pay interest on what you use, flexibility for cost overruns
Debt Consolidation
Paying off credit cards, personal loans, or other high-interest debt
Fixed rate and payment help with budgeting, lump sum pays off all debt at once
Emergency Fund or Financial Safety Net
Access to funds for unexpected expenses or opportunities
Funds available when needed, no interest until you use them, acts like emergency credit
Large Purchase with Known Cost
Buying a car, paying for education, or other specific large expense
Fixed rate protects against rate increases, predictable payments for budgeting
Investment Property Down Payment
Using equity to purchase rental or investment property
Fixed rate and terms, lump sum for down payment, predictable costs for investment analysis
Starting a Business
Funding a new business venture or expanding an existing one
Flexible access to capital as business grows, lower initial costs, can pay down and re-borrow
Decision Framework
Ask yourself these questions to help determine the best option:
Choose a HELOC if you:
Choose a Home Equity Loan if you:
Important Considerations
Risk to Your Home
Both HELOCs and home equity loans use your home as collateral. If you can't make payments, you could lose your home to foreclosure. Only borrow what you can afford to repay.
Tax Implications
Interest may be tax-deductible if you use the funds to "buy, build, or substantially improve" your home. Consult a tax professional for advice on your specific situation.
Market Conditions
Interest rates and home values can change. Consider how potential changes might affect your loan and your overall financial situation.
Ready to Explore Your Options?
Use our calculator to see how much you can borrow with either option, or speak with our experts to discuss your specific needs.