If you own a home and have built up equity, you have two main ways to borrow against it: a home equity loan and a home equity line of credit (HELOC). Both use your house as collateral, both typically carry lower interest rates than unsecured personal loans or credit cards, and both can put your home at risk if you fall behind. The differences come down to how you receive the money, how the rate behaves, and how you repay it. Choosing well can save you thousands of dollars; choosing poorly can mean paying interest on money you never needed.
How a Home Equity Loan Works
A home equity loan, sometimes called a second mortgage, delivers a single lump sum at closing. You repay it in equal monthly installments over a fixed term, usually 5 to 30 years, at a fixed interest rate. Because the rate never changes, your payment is predictable, which makes it a good fit for one-time expenses with a known cost.
Typical uses include:
- Consolidating high-interest credit card debt
- Funding a major home renovation
- Paying for a wedding, medical bill, or tuition
- Covering a down payment on a second property
Lenders generally let you borrow up to 80% or 85% of your home's appraised value, minus what you still owe on your first mortgage. That figure is your combined loan-to-value ratio, or CLTV. If your home appraises at $400,000 and you owe $250,000, an 80% CLTV cap means you could access roughly $70,000.
How a HELOC Works
A home equity line of credit works more like a credit card secured by your house. You get a maximum credit limit, and you can draw money as needed during a draw period that often lasts 10 years. During that time you typically pay interest only, though you can pay principal if you choose. After the draw period ends, the loan enters repayment, and you must pay back the balance plus interest over a set term, commonly 10 to 20 years.
Most HELOCs carry variable rates tied to the prime rate, so your payment rises and falls with the market. Some lenders offer fixed-rate options on drawn portions or let you lock a rate on part of the balance. A HELOC suits ongoing or uncertain expenses, such as a multi-year renovation, a bridge while you sell a home, or a reserve fund you tap only when needed. Because you pay interest only on what you draw, you avoid paying for money you do not use.
Home Equity Loan vs Line of Credit: Key Differences
The table below summarizes the trade-offs, but the practical question is whether your expense is a one-time cost or an ongoing need.
- Disbursement: A loan pays a lump sum once; a HELOC lets you draw, repay, and draw again during the draw period.
- Interest rate: Home equity loans are usually fixed; HELOCs are usually variable.
- Payment: Loans have equal principal-and-interest payments; HELOCs often start interest-only.
- Cost: HELOCs may carry annual fees, inactivity fees, or a cancellation fee if you close early; loans may carry closing costs similar to a mortgage.
- Discipline: A fixed loan forces a repayment schedule; a HELOC can tempt you to borrow more than planned.
Rate is not the only number that matters. A HELOC with a lower introductory rate can cost more than a fixed loan if rates climb sharply during the draw period, as many borrowers learned in 2022 and 2023 when the Federal Reserve raised its target rate repeatedly. Ask each lender for the maximum rate cap and the lifetime cap before you sign.
Tax Treatment and Risks
The Tax Cuts and Jobs Act changed how home equity debt is treated. Under current IRS rules, interest on a home equity loan or HELOC is deductible only when the funds are used to buy, build, or substantially improve the home that secures the loan. Using the money to pay off credit cards or fund a vacation generally makes the interest non-deductible. The total deductible debt is capped at $750,000 for married couples filing jointly. Confirm your situation with a tax professional, since the rules are specific.
The bigger risk is your home itself. Both products are secured by your property. Miss payments and you could face foreclosure. That is why financial planners often suggest using home equity for value-adding purposes, such as improvements or debt consolidation with a clear payoff plan, rather than discretionary spending.
How to Choose Between the Two
Start with the purpose of the money. If you need a defined sum for a defined project and want a payment that never changes, a home equity loan is usually the cleaner choice. If you need flexibility, plan to borrow in stages, or want a standby source of funds, a HELOC may fit better.
Then compare offers from at least three lenders, including banks, credit unions, and online lenders. Ask about:
- The annual percentage rate, not just the teaser rate
- Closing costs and any annual or early-closure fees
- Whether the rate is fixed or variable, and the lifetime cap
- Repayment terms after the draw period on a HELOC
- Prepayment penalties, if any
Finally, run the numbers on the worst case. If a variable rate rose by several points, could you still make the payment? If not, the fixed loan is the safer path.
The Short Version
A home equity loan gives you a fixed lump sum at a fixed rate with predictable payments, ideal for one-time costs. A HELOC gives you a revolving credit line with a variable rate and interest-only payments during the draw period, ideal for flexible or staged needs. Both are secured by your home, so both demand a realistic repayment plan. Compare APRs, fees, and rate caps across lenders, confirm the tax deductibility of your specific use, and borrow only what you can comfortably repay.
