HELOC vs. Home Equity Loan: Comparing Equity Options

With home values surging nearly 50% in the last four years, many homeowners are sitting on a significant equity windfall. If you’re considering tapping into this equity, a HELOC or a home equity loan could be the way to go.

These options offer the flexibility to finance home improvements, consolidate debt, or even cover major expenses. But when it comes to a HELOC vs. home equity loan, how do you decide which is right for you?

In this post, we provide at-a-glance information to help you understand the differences and similarities between a HELOC and a home equity loan so you can make an informed choice that fits your life and financial goals.

HELOC vs. home equity loan: Differences

A HELOC and a home equity loan are both ways to tap into your home’s equity, but they function quite differently. A HELOC is more like a credit card with a variable interest rate, allowing you to borrow what you need when you need it. In contrast, a home equity loan provides a lump sum with a fixed interest rate, giving you predictability in your payments. Let’s break down these two options further to help you understand which might suit your needs better.

Home equity line of credit (HELOC)

Credit limit with a borrowing period: You’re given a set credit limit and can borrow funds as needed, typically within a 10-year draw period.
Flexible access to funds: You can withdraw money up to your limit, only paying interest on what you actually use.
Variable interest rates: Most HELOCs have rates that can fluctuate based on market conditions, affecting your payment amounts.
Interest-only payments during the draw period: Typically, you’re only required to make interest payments during the borrowing phase, with principal payments starting later.
Repayment phase after borrowing ends: Once the draw period closes, you’ll enter a repayment phase where you pay back the remaining balance, often over 10 to 20 years. Payments will change based on the amount you draw and the current interest rate.

Home equity loan

Fixed loan amount: You apply for a specific amount based on your needs and receive it in a lump sum.
Fixed interest rate: The interest rate is locked in from the start, so your payments remain consistent throughout the life of the loan.
Predictable monthly payments: Each payment is the same every month, covering both interest and a portion of the principal.
Ideal for one-time expenses: Best suited for large, one-off expenses where you need a set amount of money upfront.
Repayment over a fixed term: You’ll repay the loan over a predetermined period, typically 5 to 30 years, depending on the loan terms.