If you own a home with equity built up, you can borrow against it two ways: a home equity loan or a HELOC. Both use your house as collateral. They work very differently from each other, though, and picking the wrong one either costs you extra interest or leaves you with a product that doesn’t match what you need.
Home equity loan: lump sum, fixed rate
You borrow a set amount, you get it all at closing, and you pay it back over 5 to 30 years at a fixed rate with fixed monthly payments. Basically a second mortgage.
Borrow $40,000 at 7.5%, your payment is the same every month for the entire term. Rates don’t move. If the Fed raises rates after you close, you don’t care. You locked in already.
Rates on these are lower than personal loans or credit cards because the house backs the debt. Typical range is 6% to 9% depending on credit, equity, and the lender.
The catch: interest starts accruing on the full amount the day the loan closes. If you’re paying a contractor $40,000 for a kitchen but the work takes six months, you’re paying interest on money that’s sitting in your account waiting to be spent. That’s the inefficiency. For a one-time expense where you need the full amount up front, it’s fine. For anything spread over time, it’s wasteful.
HELOC: credit line, variable rate
A HELOC is more like a credit card secured by your house. The lender approves a maximum credit limit, and you draw from it when you need to during a draw period that usually lasts 5 to 10 years.
You only pay interest on what you’ve used. $50,000 limit but you’ve only pulled $10,000? You’re paying interest on $10,000. This is the big advantage if you need money in stages.
The rate is almost always variable. It’s pegged to the prime rate plus a margin from the lender. When the Fed raises rates, your payment goes up. In 2022 and 2023, HELOC holders watched their rates climb 2 to 4 points as the Fed hiked aggressively. Monthly payments jumped by hundreds of dollars for people with large balances.
When the draw period ends, you enter repayment, usually 10 to 20 years. You can’t borrow anymore. You just pay back what you owe. Some HELOCs require the full balance when the draw period closes, which creates a large balloon payment if you haven’t been chipping away at principal. Read this part of the contract carefully.
The rate question
Home equity loans: fixed. You know the rate on day one and it stays there.
HELOCs: variable. Starts lower. Can climb. People who opened HELOCs at 4% in 2021 were paying 8% or 9% by 2023.
Some lenders offer fixed rate HELOCs or let you lock portions of your balance at a fixed rate. These hybrid options exist but aren’t standard. If rate stability matters to you, ask about it.
When the home equity loan is the better choice
You know exactly how much you need. Contractor quote for $35,000, credit card debt of $25,000. The number is clear and it’s not changing.
You want the same payment every month. Fixed rate means no surprises. Budget around it and forget it.
You’re borrowing when rates are low. Locking in protects you. Homeowners who took equity loans at 5% in 2020 are in better shape than people who opened HELOCs at the same time and watched variable rates nearly double.
When the HELOC is the better choice
You need money over time. Home renovations spread across several months. College tuition paid semester by semester. You don’t want to borrow $50,000 on day one if you only need $8,000 this month.
You might not use the full amount. A HELOC with a $50,000 limit costs you nothing until you draw on it. The credit line just sits there as an option. Useful if you want a safety net without committing to a specific loan amount.
You’ll pay it back fast. Variable rates matter less on debt you’re holding for a short time. If you’re using the HELOC for a six-month project and paying it off right after, rate movements won’t have time to affect you much.
Your house is the collateral
Worth saying plainly: if you stop paying on either of these, the lender can take the house. That’s the trade-off for the lower rate compared to unsecured borrowing like personal loans and credit cards.
Think about this before you sign. Taking a HELOC and then losing your job means you’re at risk of losing both income and your home. Using equity to pay off credit card debt only works if you actually stop using the credit cards. Consolidating $25,000 in card debt into a home equity loan and then running the cards back up leaves you with $25,000 in home-secured debt plus whatever new balance you’ve built on the cards. That’s worse than where you started.
Closing costs and fees
Both products have closing costs: appraisal, title search, application fees, possibly attorney fees. Usually $2,000 to $5,000.
Some lenders waive closing costs on HELOCs, but the deal often requires keeping the line open for at least three years. Close it early and they bill you for the waived costs.
HELOCs sometimes carry an annual fee of $50 to $100. Home equity loans usually don’t have ongoing fees after funding.
How much you can borrow
Most lenders cap you at 80% to 85% of the home’s appraised value, minus what you owe on the mortgage.
Home worth $400,000, mortgage balance $250,000, and the lender uses an 80% limit: ($400,000 x 0.80) – $250,000 = $70,000 available.
Some lenders go to 90% or 95%, but the rates are higher and you’re taking on more risk. If property values dip, you could owe more than the home is worth.
The quick version
Know exactly what you need, want fixed payments: home equity loan.
Need flexibility, drawing money over time, comfortable with a variable rate: HELOC.
Not sure: the home equity loan is simpler and removes the rate uncertainty. The HELOC saves you money if your needs are variable and you have the discipline to manage a revolving line of credit that’s tied to your house.