HELOC vs. Home Equity Loan: How They Compare and Which Is Right for You

With interest rates at an all-time low, many homeowners are starting to consider taking out a second mortgage. Second mortgages like home equity loans and home equity lines of credit can be a great way to finance major expenses — such as an upcoming home improvement project, a wedding, or even college tuition.

But like any form of debt, it’s good to know your options before making a commitment, which is why we’ve created this handy little guide to understanding the differences between HELOCs vs. home equity loans. Here’s everything you’ll want to know about these home loans before signing your name on the dotted line.

HELOC vs. home equity loan: how do they compare?

A home equity loan and a home equity line of credit are two different financial products that allow you to borrow against the value of your home. Although home equity loans allow you to borrow a large sum all at once, HELOCs work more like a credit card, making it easy to borrow and repay only what you need over a set period of time.

The exact amount you can borrow, as well as your repayment terms, will depend on the equity you have in your home and your overall creditworthiness. Because both of these are considered secured debt, meaning they use your home as collateral, you’ll want to be sure you’re comfortable with the repayment terms as failing to pay might mean losing your home. Like any form of debt, be sure to take the time to shop around before moving forward. Research the best mortgage lenders to be sure you choose the best option for you.

Here’s a quick at-a-glance comparison of HELOCs vs. home equity loans:

	HELOC	Home equity loan
Interest rates	6.49%-8.77%	6.93%-9.44%
Maximum loan amount	85% of your home’s equity	85% of your home’s equity
Tax-deductible interest?	Yes, if the loan is used to make substantial home improvements	Yes, if the loan is used to make substantial home improvements
How funds are disbursed	Via check or online transfer	Via check or online transfer
Fees	Typically 2-5% of total loan amount	Typically 2-5% of total loan amount
Monthly payment amounts	Variable, depending on how much you borrow	Fixed

What is a home equity loan?

A home equity loan is a type of second mortgage that’s granted based on the equity you currently have in your home. You can determine how much of a home equity loan you might qualify for by figuring out the value of your equity. Equity is determined by subtracting what you still owe on your mortgage from the market value of the home itself.

You’ll be limited to borrowing up to 85% of that equity value, with other factors such as your credit score and debt-to-income ratio also impacting the final loan amount.

Here’s an example: if your home’s market value is $300,000 and you still owe $200,000 on your current mortgage — then you’d have $100,000 equity in the home. You could potentially borrow up to $85,000.

What can a home equity loan be used for?

Although home equity loans can be used to pay for just about anything, people typically use them to pay for major expenses such as weddings, education costs, or major home improvement projects. That’s because the amount of the loan is typically granted in one lump sum that borrowers then repay over time. One benefit of borrowing a home equity loan is you’re likely to find one with fixed interest rates. This will protect you from any unexpected changes and expenses that can occur when borrowing a loan with variable interest rates.

What to expect when you apply for a home equity loan

Many people wonder how to get a loan and how long the process takes. For anyone interested in taking out a home equity loan, you should plan on at least two weeks of processing time before you see the money. The wait can easily increase to six weeks, depending on the complexity of the loan and the lender you work with. Also, keep in mind any closing costs and origination fees associated with taking out a home equity loan — which will typically cost an additional 2% to 5% of the approved loan amount.

Finally, if you decide to borrow a home equity loan to make repairs on your home — you might be eligible for some nifty tax deductions. According to the Tax Cuts and Jobs Act, borrowers can write off interest payments made on home equity loans (and HELOCs) as long as the loan is used to “buy, build or substantially improve the taxpayer’s home.” And although this law passed back in 2017, it should remain unchanged through 2026.

Pros of a home equity loan

• Fixed rates make repayment schedules more reliable
• Some interest payments may be tax-deductible

Cons of a home equity loan

• Must repay the entire loan balance, even if you don’t end up needing all of it
• Interest rates can be higher than the introductory rates for HELOCs
• Longer processing and approval times than other loan types
• Your home is collateral — you run the risk of losing it for missed payments

What is a HELOC?

Unlike a home equity loan, HELOCs work more like a credit card — as a revolving line of credit (with an approved credit limit) that you repay based on what you spend. Although some home equity loans have fixed interest rates, most HELOCs will have variable ones — meaning you might pay more or less interest on your borrowed amounts over the life of the loan.

The value of your HELOC likely won’t exceed 85% of your home’s equity and approval will depend on your overall creditworthiness.

What can a HELOC be used for?

Similar to a traditional home equity loan, HELOCs are typically used to cover a major cost such as a home remodel. These lines of credit can also be used for debt consolidation and to pay for tuition costs, though it’s important to compare interest rates before you opt for a HELOC in these cases.

What to expect when you apply for a HELOC

HELOCs come with closing costs and fees that tend to fall within the 2% to 5% range, and can take anywhere from two to six weeks to process. Another thing to keep in mind with HELOCs is that they often have a fixed borrowing period called a draw period. This means you’ll be able to borrow from your HELOC only for a set period of time, usually about five-to-ten years from the time you make your first withdrawal.

During this time, you might only be required to make interest payments on what you borrow, but you can also withdraw various amounts (and pay them back) as many times as you want. After the draw period, most HELOCs enter into a repayment period, which is when recurring payments must be made on the remaining balance you owe.

Because of all these time-sensitive details, it’s especially important to make sure you fully understand your HELOC agreement before signing. This includes the stipulations of both your draw and repayment periods, as well as what actions your lender might take if you fail to make payments. Because HELOCs (and home equity loans) are both considered secured loans that use your home as collateral, missing payments could potentially put your home at risk.

Pros of a HELOC

• Can be used like a credit card (withdrawing and repaying an unlimited number of times) during your draw period
• Only required to repay what you spend
• Introductory interest rates may be lower than home equity loan rates
• Some interest payments may be tax-deductible

Cons of a HELOC

• Variable rates are common so your rate can increase over time
• Longer processing and approval times than other loan types
• Your home is collateral — you run the risk of losing it for missed payments

HELOC vs. home equity loan: Which is the better option?

Because the amount of money you’ll be able to borrow from both a HELOC and a home equity loan primarily depends on your home’s value, the main difference we find between the two is in how you repay them. One slight exception would be that with a HELOC, you could potentially borrow more — if you had the means to borrow and repay from your credit line multiple times within the draw period. This scenario aside, let’s take a look at how repayment for both loans works.

Home equity loan repayment

With a home equity loan, you’ll be approved for one lump sum that you’ll be responsible for repaying— even if the amount exceeds what you actually end up needing. This is one of the reasons that home equity loans are so often used to pay for home repairs. After coming up with a total estimate for your project, you’ll be better able to decide if borrowing such a large sum is actually necessary.

If you do need to borrow that much money, the good news is that you’ll likely be able to find a loan with a fixed interest rate — making repayments more regular and easier to budget in the long term. Because repayment plans tend to last anywhere from 15 to 30 years, and guarantees you can afford regular monthly payments is a huge part of responsible borrowing when it comes to these types of loans.

HELOC repayment

On the other hand, you may want to have borrowing power without necessarily committing yourself to $85,000 in debt. That’s when a HELOC might make more sense for your financial situation. Because you only repay what you borrow, you’ll have the potential to borrow a large sum without necessarily being forced to repay the entire thing (unless you actually do spend it all). This is a great option for people who know they need to borrow a large amount but aren’t exactly sure how much.

Because the draw period on a HELOC typically lasts five-to-ten years, you’ll also have time to borrow a little bit at first and more later on should you need it. The one caveat with HELOCs is that variable interest rates are pretty common. This might make it harder to afford payments once you enter into the repayment period. Although some HELOCs may offer fixed interest rates, these tend to be higher than the variable ones. Review all your options with your lender before signing anything, and if something seems unclear, remember that you always have what’s called the three-day cancellation rule.

The three-day cancellation rule

When signing on any home equity loan or HELOC, it’s important to know that you’re covered under what’s called the three-day cancellation rule. This rule, protected by federal law, allows you to reconsider a signed credit agreement or cancel a deal for any reason up to three days after the agreement has been finalized. This third day is considered to end at the stroke of midnight three business days after you sign the contract.

The first thing to keep in mind with the three-day rule is that the agreement must be for your primary residence and won’t apply to second or vacation properties. One last bit of advice: Make sure you cancel in writing if you decide to — phone or in-person cancellations won’t count.

HELOC vs. home equity loan FAQs

The bottom line

Both home equity loans and HELOCs are a great way to borrow against the value of your home, as long as you have the means to make regular payments when the time comes. Because these loans are best for people wishing to borrow large sums of money, they might be overkill for some borrowers. If you’re simply looking for a way to pay for minor home repairs or other small projects, take the time to consider one of these top-rated personal loans instead.

Disclaimer: All rates and fees are accurate as of Feb. 8, 2023.