HELOC vs. Home Equity Loan: Which Is Right for You?

Editorial note: This guide is for general education, not individualized financial advice. We independently research every topic and cite our sources. Our editorial standards · How we make money.

As you pay down your mortgage and your home gains value, you build equity — and that equity can be borrowed against, usually at lower rates than credit cards or personal loans. The two most common ways to do it are a home equity loan and a home equity line of credit (HELOC). They are both secured by your home, but they work very differently.

Estimate how much you may be able to borrow with the home equity calculator.

How much equity can you use?

Home equity = current home value − mortgage balance(s)

Lenders usually limit total borrowing against the home to a combined loan-to-value (CLTV) ratio, often around 80% to 85%.

Example: $450,000 home, $260,000 mortgage, 85% CLTV limit. Maximum total debt: $450,000 × 0.85 = $382,500. Maximum new borrowing: $382,500 − $260,000 = $122,500.

Home equity loan: a lump sum at a fixed rate

A home equity loan — sometimes called a second mortgage — gives you the full amount upfront. You repay it in equal monthly payments over a fixed term, often 5 to 30 years, usually at a fixed rate.

Best for: a single large expense with a known cost, such as a major renovation.

Pros

• Predictable payment that never changes
• Protection from rising rates
• Clear payoff date

Cons

• You pay interest on the full amount from day one
• Less flexible if costs change
• Closing costs may apply

HELOC: a flexible line of credit

A HELOC works more like a credit card secured by your home. You are approved for a maximum line and draw from it as needed.

It has two phases:

1. Draw period (often around 10 years): borrow, repay and borrow again. Many HELOCs require only interest payments during this period.
2. Repayment period (often 10 to 20 years): you can no longer draw, and you repay principal plus interest.

Most HELOCs have a variable rate tied to an index such as the prime rate, plus a margin. Some lenders let you lock a fixed rate on part of the balance.

Best for: ongoing or uncertain costs — a renovation done in stages, tuition paid over several years, or a financial backstop.

Pros

• Borrow only what you need, when you need it
• Pay interest only on what you have drawn
• Often lower initial rates

Cons

• Variable rates can rise
• Payment shock when the draw period ends and principal payments begin
• Lender can freeze or reduce the line in some situations
• Temptation to use it for non-essential spending

Side-by-side comparison

Payment shock: a HELOC example

Suppose you draw $50,000 on a HELOC at 8.5%.

• During the draw period (interest-only): about $354 a month.
• After the draw period (20-year repayment at the same rate): about $434 a month.

If rates have risen by then — say to 10.5% — the repayment payment would be about $499. Plan for the higher payment from the start.

Costs to compare

• Interest rate and APR (for HELOCs, the index and margin)
• Closing costs: appraisal, origination and title fees
• Annual or inactivity fees on HELOCs
• Early closure fees if you close a HELOC within a few years
• Rate caps on variable-rate HELOCs

Tax rules

Under current IRS rules, interest on a home equity loan or HELOC may be deductible only if you itemize and the funds are used to buy, build or substantially improve the home that secures the loan, subject to overall mortgage debt limits. Interest on funds used for other purposes, such as paying off credit cards, is generally not deductible. See IRS Publication 936 or consult a tax professional.

Alternatives

• Cash-out refinance: replaces your first mortgage with a larger one. Can make sense if the new rate is similar to or lower than your current rate — but if your existing rate is low, a separate home equity loan or HELOC may cost less. See our refinancing page.
• Personal loan: unsecured, so your home is not at risk, but usually a higher rate. See personal loans.
• Savings: for smaller projects, paying cash avoids interest and risk entirely.

Using home equity responsibly

Because your home secures the debt, falling behind can lead to foreclosure. Borrow for purposes that strengthen your finances — such as value-adding improvements or replacing much higher-interest debt with a firm plan to repay — and avoid using home equity for everyday spending or vacations.

The bottom line

Choose a home equity loan when you know exactly how much you need and want a fixed, predictable payment. Choose a HELOC when you need flexibility and can handle a variable rate and the eventual shift to principal payments. Either way, compare several lenders, understand the costs and borrow only what you can comfortably repay. Explore more in our home equity section.

This guide is part of our Mortgage hub and our complete personal finance guide. Spot an error? Request a correction.