On this page 8 sections
In short
- Home equity loan: lump sum, usually a fixed rate, the same payment until it's paid off.
- HELOC: draw as needed, interest only on what you use, a payment that usually changes.
- One known expense paid all at once points to a loan. Costs spread over time point to a line.
- Fixed-rate HELOCs blur the line, so compare the actual terms, not the label.
Side by side
| HELOC | Home equity loan | |
|---|---|---|
| How you get the money | Draw as needed during the draw period. Some programs fund the full line at closing. | Lump sum at closing |
| Interest charged on | What you've drawn | The full loan from day one |
| Rate | Often variable: an index plus a margin. Some programs offer fixed-rate options. | Usually fixed |
| Payment | Can change with the rate and when the draw period ends | Usually the same every month |
| Borrow again after repaying | Yes, during the draw period | No. You'd need a new loan. |
| Federal disclosures | HELOC disclosures and the CFPB HELOC booklet | Loan Estimate and Closing Disclosure |
| Your first mortgage | Stays as is | Stays as is |
| Right to cancel on your principal residence | Generally three business days | Generally three business days |
What drawing in stages saves
Say a renovation costs $120,000, paid to the contractor in three $40,000 installments: at the start, three months in and six months in. Assume the same rate on both, so only the structure differs.
| Home equity loan | HELOC drawn in stages | |
|---|---|---|
| Owed in months 1 to 3 | $120,000 | $40,000 |
| Owed in months 4 to 6 | $120,000 | $80,000 |
| Owed in months 7 to 12 | $120,000 | $120,000 |
| First-year interest, relative | 100% | 75% |
At the same rate, the line charges about a quarter less interest in year one, because interest starts only when the money goes out. The gap narrows if you'd park the lump sum somewhere that pays interest, and it disappears if you need all the money on day one. Real rates for the two products can differ, and a variable rate can move.
When a home equity loan fits
- You need one amount, all at once: paying off debts, a single purchase or a project paid up front.
- You want a payment that never changes.
- You'd rather not have open credit available against your home.
When a HELOC fits
- Costs arrive over time, like a renovation paid in stages or tuition paid by semester.
- You don't know the final amount yet.
- You expect to pay it back fairly quickly, so a variable rate matters less.
- You want funds available without paying interest until you use them. A lender can freeze a line in some situations, so don't treat it as a sure thing.
What about a fixed-rate HELOC?
Some HELOC programs offer a fixed rate and a fully amortizing payment, which makes the monthly payment look a lot like a home equity loan's. Others let you lock part of a variable balance at a fixed rate. The label matters less than the terms: how the money is paid out, whether you can borrow again, how the rate is set and what fees apply. See fixed-rate HELOCs.
How to compare offers
Ask for quotes on the same amount and the same term, then compare:
- The rate and how it can change. For a HELOC, that means the index, the margin, the lifetime cap and any introductory rate. See how HELOC rates are set.
- All the fees. A home equity loan's APR includes lender charges such as points and origination fees, but not title and appraisal costs, so check the Loan Estimate too. The APR in a HELOC's disclosures doesn't include fees, so add them up yourself. That also means the two products' APRs aren't directly comparable.
- The payment over time. For a HELOC, ask what the payment becomes after the draw period. See draw vs. repayment period.
- Early payoff costs. Check for a prepayment penalty or a fee for closing the line early.
Not sure how much you could borrow? Start with the HELOC calculator. A licensed loan officer can also quote both options side by side.
Frequently asked questions
Is a HELOC or a home equity loan better?
Neither is better across the board. A home equity loan suits one known expense paid all at once and a payment that stays the same. A HELOC suits costs that arrive over time, because you pay interest only on what you draw.
Which has a lower rate, a HELOC or a home equity loan?
It depends on the lender, the program and the market. A variable HELOC can start lower or higher than a fixed home equity loan. Compare offers on the same amount and term, and include the fees.
Do both use my home as collateral?
Yes. Both are secured by your home, usually behind your first mortgage. If you don't repay either one, you could lose the home.
Is the interest tax deductible on both?
The same IRS rule applies to both. As home mortgage interest, it's generally deductible only if the money is used to buy, build or substantially improve the home that secures the loan, within IRS limits. Different rules can apply if the money goes to a business or investment. Ask a tax professional about your situation.
Can I pay off either one early?
Usually, but check the agreement for a prepayment penalty or a fee for closing the line early before you sign.
Questions about your own situation? Contact a licensed loan officer. It's optional, and your information is not sold to lead marketplaces.