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

How Home Equity Borrowing Works

Your home equity is the difference between your property's current market value and the remaining balance on your mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. Both home equity loans and home equity lines of credit let you borrow against that equity, but they work in fundamentally different ways.

A home equity loan gives you a lump sum at a fixed interest rate, repaid over a set term — typically 5 to 30 years. You receive the full amount upfront and begin making fixed monthly payments immediately. The rate is locked in at closing and never changes, which makes budgeting straightforward. Think of it as a second mortgage with predictable payments.

A HELOC works more like a credit card secured by your home. You receive a revolving credit line that you can draw from as needed during a draw period, usually 5 to 10 years. During the draw period, you typically make interest-only payments on whatever balance you have outstanding. After the draw period ends, the repayment period begins — usually 10 to 20 years — during which you repay the principal plus interest. Most HELOCs carry variable interest rates tied to the prime rate.

When to Choose Each Option

Choose a home equity loan when: you know exactly how much you need, you want payment certainty, or you are funding a one-time expense like a major renovation, debt consolidation, or a large purchase. The fixed rate protects you from rising interest rates, and the predictable payment schedule makes it easier to incorporate into your budget. Home equity loans are also generally better when rates are low and expected to rise.

Choose a HELOC when: you need flexible access to funds over time — for example, an ongoing renovation where costs come in phases, education expenses spread across multiple semesters, or as an emergency reserve you hope you will not need. You only pay interest on what you actually use, so if you draw $20,000 from a $100,000 line, you are only paying interest on the $20,000. HELOCs also tend to have lower closing costs and sometimes no closing costs at all.

Some homeowners use both: a home equity loan for a known expense and a HELOC as a flexible backup. Just be aware that both are secured by your home — defaulting on either can result in foreclosure, regardless of how small the balance.

Interest Rates and Costs Compared

Home equity loan rates are fixed, meaning the rate you lock in at closing stays the same for the life of the loan. As of mid-2026, rates on home equity loans typically run 1 to 2 percentage points above 30-year mortgage rates. Closing costs usually range from 2 to 5 percent of the loan amount and include an appraisal, origination fee, title search, and recording fees.

HELOC rates are variable. Most are calculated as the prime rate plus a margin set by the lender. If the prime rate is 8.5 percent and your margin is 1 percent, your rate is 9.5 percent — but that changes every time the Federal Reserve adjusts rates. Some lenders offer introductory rates or rate caps, but read the fine print carefully. Closing costs on HELOCs are generally lower — many lenders waive them entirely, though they may charge an annual fee of $50 to $100 or an inactivity fee if you do not draw on the line.

One important consideration: some HELOCs allow you to convert a portion of your balance to a fixed rate, giving you hybrid flexibility. This feature is increasingly common and can be valuable if you want the HELOC's flexibility for initial draws but want to lock in a fixed rate once you know your final balance.

Tax Deduction Rules for Home Equity Debt

The Tax Cuts and Jobs Act of 2017 changed the rules for deducting home equity interest. Under current law, interest on home equity debt is only deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. If you take a home equity loan to renovate your kitchen, the interest is deductible. If you use it to pay off credit cards or fund a vacation, it is not.

The combined limit for deductible mortgage interest — including your first mortgage and any home equity debt used for home improvements — is $750,000 for loans originating after December 15, 2017. For loans before that date, the limit is $1 million. These limits apply to the total of all mortgage debt, not to each loan separately.

Keep detailed records of how you use the proceeds. If you use a $60,000 home equity loan and spend $45,000 on a bathroom renovation and $15,000 on a car, only the interest attributable to the $45,000 renovation portion is deductible. Your tax preparer will need documentation showing how the funds were allocated.

Risks You Need to Understand

The single biggest risk of both home equity loans and HELOCs is that your home is the collateral. Miss enough payments and the lender can foreclose — even if your first mortgage is current. This makes home equity debt fundamentally different from unsecured debt like credit cards, where the worst outcome is damaged credit and collection calls, not losing your home.

For HELOCs specifically, payment shock is a real danger. During the draw period when you are making interest-only payments, the monthly cost feels manageable. But when the repayment period begins and you start paying principal plus interest, your payment can double or even triple. Borrowers who stretched to afford the interest-only payments during the draw period sometimes find the full payments unmanageable.

There is also the risk of being underwater. If home values decline — as they did in 2008 and in some markets during interest rate spikes — you could owe more than your home is worth. Selling the home would not cover both your first mortgage and the home equity debt, leaving you to cover the difference out of pocket or negotiate a short sale. Borrow conservatively: most financial advisors suggest keeping your combined loan-to-value ratio below 80 percent, even if lenders will approve up to 85 or 90 percent.

Frequently Asked Questions