The rule of thumb: if you know the exact amount you need and want a payment that never changes, a home equity loan usually fits better. If you’ll need money in stages over several years, or aren’t sure how much you’ll need, a home equity line of credit (HELOC) usually fits better. Both are secured by your house, which means the lowest rates you’ll find on most non-mortgage borrowing come with the most serious consequence if you can’t pay.
How each one works
A home equity loan is a second mortgage paid out as one lump sum at closing. It usually has a fixed rate and a fixed term, often somewhere between five and 30 years, with equal monthly payments that pay it off by the end. It behaves much like a car loan or your first mortgage.
A HELOC is a revolving line of credit secured by your home. The CFPB describes it as an “open-end” line that you can borrow from repeatedly up to a limit. It has two phases:
- The draw period, often around 10 years, when you can borrow, repay and borrow again. Many HELOCs only require interest payments during this time.
- The repayment period, often 10 to 20 years, when you can no longer draw and must pay back principal plus interest. Payments often rise sharply at this point.
Most HELOCs have a variable rate tied to an index, usually the prime rate, plus a margin. When the Federal Reserve raises or lowers rates, your HELOC rate generally follows within a billing cycle or two.
Side by side
| Home equity loan | HELOC | |
|---|---|---|
| How you get the money | One lump sum at closing | Draw as needed, up to a credit limit |
| Interest rate | Usually fixed | Usually variable; some allow fixed-rate portions |
| Interest charged on | The full amount from day one | Only what you’ve drawn |
| Monthly payment | Fixed principal and interest | Varies with balance and rate; often interest-only during draw |
| Closing costs | Often similar to a mortgage, though some lenders reduce them | Often lower upfront, but may include annual fees or early-closure fees |
| Biggest risk | Borrowing more than you need and paying interest on all of it | Rising rates and payment shock when the draw period ends |
| Best fit | One-time cost with a known price | Ongoing or uncertain costs over time |
How much you can borrow
Lenders look at your combined loan-to-value ratio: everything you’ll owe against the house, divided by its appraised value. Many lenders cap that around 80% to 85%, though some go higher for strong borrowers. Say a hypothetical home appraises at $400,000 with $240,000 left on the first mortgage. At an 85% cap, total borrowing tops out at $340,000, leaving up to $100,000 available. At 80%, it’s $80,000.
The lender will also check your credit and your debt-to-income ratio, counting the new payment. For a HELOC, some lenders calculate that payment as if the full line were drawn.
When each one makes more sense
A home equity loan suits a single project with a firm quote, such as a roof replacement or a kitchen with a signed contract. You lock in the rate, know the payment, and the loan has a clear end date. It’s also the safer pick if a payment that could rise would strain your budget.
A HELOC suits costs that come in pieces: a renovation done room by room, tuition paid each semester, or a backup source of cash for a small business. You only pay interest on what you use. The trade-off is uncertainty in both the rate and, eventually, the payment.
For both, the purpose matters. Using home equity to pay off credit cards can lower your interest rate, but it turns unsecured debt into debt backed by your house. If spending habits don’t change, people can end up with new card balances and a second mortgage. Our guide to debt consolidation loans covers that risk in more detail.
Frequently asked questions
Is the interest tax-deductible?
Only in some cases. Under the rules in IRS Publication 936, which the 2025 tax law made permanent, interest on a home equity loan or HELOC is deductible only if the money is used to buy, build or substantially improve the home that secures it, and only within the overall $750,000 limit on mortgage debt. You also have to itemize. Interest on equity used for a car, tuition or credit card payoff isn’t deductible.
Can a lender freeze or cut my HELOC?
Yes, in certain situations. Federal rules allow lenders to suspend draws or reduce the credit limit if your home’s value drops significantly or your financial situation changes materially, for example after a major credit problem. That’s why it’s risky to count on an unused HELOC as your only emergency fund.
Can I change my mind after closing?
For a home equity loan or HELOC on your primary residence, federal law generally gives you a right to cancel until midnight of the third business day after closing, receiving your disclosures or receiving the rescission notice, whichever happens last. Lenders don’t release funds until that period ends.
What happens to the loan if I sell the house?
Both get paid off from the sale proceeds at closing, along with your first mortgage. If the house sells for less than you owe on all of them combined, you’d need to bring cash to closing or negotiate with the lenders.
Is a cash-out refinance a better option?
It can be when current mortgage rates are close to or lower than your existing rate, since you replace the whole first mortgage. If your existing rate is much lower than today’s rates, refinancing the entire balance to get cash usually costs more than adding a separate home equity loan or HELOC.
Questions to ask lenders
Get quotes from at least two or three lenders, including your current mortgage servicer and a local credit union, and ask each the same questions:
- What’s the APR, and for a HELOC, what index and margin is the rate based on?
- Is there a rate cap? How high can the rate go over the life of the line, and how much can it rise at once?
- How long is the draw period and the repayment period? What will the payment be when repayment starts, for the amount I expect to borrow?
- Are draw-period payments interest-only, and can I pay principal anytime without a fee?
- Can I lock all or part of a HELOC balance at a fixed rate? What does that cost?
- What are the total closing costs, and are there annual fees, inactivity fees, a minimum draw or a fee for closing the line early?
- What combined loan-to-value ratio do you allow, and is an appraisal required?
- Under what conditions can you freeze or lower my line?
Write the answers down side by side. The cheapest option on paper isn’t always the one with the lowest starting rate. A fixed payment you can count on for 15 years may be worth more than a HELOC that starts a little lower and has no ceiling.
