HELOC vs. Home Equity Loan: Which Is Right for You?
Both let you borrow against your equity, and they behave completely differently. The right one depends on whether your expense is a number or a range.
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A home equity loan is a lump sum at a fixed rate. A HELOC is a revolving line you draw from as needed, usually at a variable rate. Both are secured by your home, which means both carry the same ultimate risk: default can lead to foreclosure.
Side by side
| HELOC | Home equity loan | |
|---|---|---|
| Disbursement | Draw as needed during the draw period | Full amount at closing |
| Rate | Usually variable, tied to an index | Usually fixed |
| Payment | Interest-only during draw, then principal and interest | Fixed payment from day one |
| Typical term | 10-year draw + 20-year repayment | 5 – 30 years |
| Closing costs | Often low or waived | Similar to a small mortgage |
| Best for | Phased projects, uncertain totals, reserve capacity | One defined expense with a known cost |
| Main risk | Payment shock when the draw period ends | Borrowing more than needed |
How much you can borrow
Lenders generally allow total borrowing up to 80 to 85 percent of the home's value, including the first mortgage. On a $500,000 home with a $300,000 mortgage at an 85 percent limit, that is $425,000 total, leaving up to $125,000 available. Your income and credit still have to support the payment.
The HELOC risk people underestimate
Two things change when the draw period ends. Interest-only payments become fully amortizing, and the remaining term is shorter than the original schedule implies. A $60,000 balance that cost roughly $325 a month in interest-only payments can jump to $600 or more once principal begins. Model that payment before you draw, not after.
Costs to compare
- Application, appraisal, and title fees, though many HELOCs waive them
- Annual maintenance fees on some lines
- Early closure fees if the line is closed within a stated period, often two to three years
- Rate caps — ask for both the periodic cap and the lifetime cap on a variable line
- Whether a fixed-rate conversion option exists, and what it costs
Interest deductibility
Under current federal rules, interest on home equity borrowing is generally deductible only when the funds are used to buy, build, or substantially improve the home securing the loan, and subject to overall limits. Using a HELOC to consolidate credit card debt generally does not qualify. Keep records tying draws to improvement expenses, and consult a tax professional.
The consolidation question
Converting unsecured debt into debt secured by your house lowers the interest rate and raises the stakes. It can be sound if the underlying spending problem is solved, and it is dangerous if it is not — because the consequence of falling behind changes from a collections call to a foreclosure filing.
Frequently asked questions
How much equity do I need for a HELOC?
Most lenders want you to retain 15 to 20 percent equity after the line is included, and they will look at credit score and debt-to-income as well.
Can I pay off a HELOC early?
Yes, though check for early closure fees within the first few years. Paying down principal during the draw period restores your available credit.
Which is cheaper, a HELOC or a home equity loan?
HELOCs usually start lower because they are variable and have lower closing costs, but the rate can rise. A home equity loan costs more up front and eliminates rate uncertainty.
Editorial note. This article is educational and is not financial, tax, or legal advice. Loan terms, rates, insurance costs, and tax rules vary by lender, state, and individual circumstance. Figures shown are illustrative. Confirm details with a licensed lender, tax professional, or attorney before making a decision.
