HELOC vs. Home Equity Loan: Which Is Right for You?
HELOC vs. home equity loan compared: how each works, fixed vs. variable rates, draw and repayment periods, costs, tax rules and which fits your borrowing needs.
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Home Equity
Understand and tap the value you’ve built in your home — carefully.
What home equity is
Home equity is the share of your home you own outright: its market value minus the balance of any mortgages. It grows as you pay down your loan and as your home’s value rises. Equity is a significant part of many households’ net worth.
Ways to borrow against equity
- Home equity loan: a lump sum at a fixed rate with fixed payments.
- HELOC: a revolving line of credit, usually with a variable rate, that you draw from as needed.
- Cash-out refinance: replaces your mortgage with a larger one and pays you the difference.
Lenders typically limit total borrowing to a set combined loan-to-value ratio (CLTV), often around 80% to 85% of the home’s value.
Good and risky uses
Borrowing against equity can be reasonable for home improvements that add value, or to replace much higher-interest debt with a plan to repay it. It is risky for discretionary spending, because your home secures the loan — if you cannot repay, you could lose it.
Tax note
Interest on home equity debt may be deductible only if the funds are used to buy, build or substantially improve the home securing the loan, and you itemize, subject to limits. See IRS Publication 936.
Estimate your borrowing power with the home equity calculator and compare options in HELOC vs. home equity loan.
Frequently asked questions
How is home equity calculated?
Subtract what you owe on all loans secured by the home from its current market value. A $400,000 home with a $250,000 mortgage has $150,000 in equity.
What affects home equity loan rates?
Your credit score, combined loan-to-value ratio, debt-to-income ratio, the loan amount and whether the rate is fixed or variable. Rates are generally higher than first-mortgage rates but lower than unsecured loans.
How long does it take to get a home equity loan?
Often a few weeks, because the lender typically needs to verify income and value the home. Timelines vary by lender.
Part of our Mortgage hub and our complete personal finance guide. Read our editorial standards.
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