HELOC vs Home Equity Loan: Which is Right for You?
Compare the key differences between HELOCs and home equity loans to make an informed decision about your home equity financing options.
Quick Answer
HELOC: Revolving credit line with variable rates, flexible borrowing.Home Equity Loan: Lump sum with fixed rates and payments. Choose HELOC for ongoing projects, home equity loan for one-time expenses.
Understanding the Basics
What is a HELOC?
A Home Equity Line of Credit (HELOC) is a revolving line of credit that allows you to borrow against your home's equity. It works like a credit card - you have a credit limit and can borrow, repay, and borrow again as needed during the draw period.
What is a Home Equity Loan?
A home equity loan (also called a second mortgage) provides you with a lump sum of money upfront, which you repay in fixed monthly payments over a set term, similar to a traditional mortgage.
Key Differences Comparison
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| How you receive money | As needed, up to credit limit | Lump sum upfront |
| Interest rate | Usually variable | Usually fixed |
| Monthly payments | Variable (interest-only during draw period) | Fixed amount |
| Repayment structure | Draw period + repayment period | Fixed term (5-30 years) |
| Flexibility | High - borrow as needed | Low - fixed amount |
| Best for | Ongoing projects, emergencies | One-time large expenses |
When to Choose a HELOC
Advantages of HELOCs:
- Flexibility: Borrow only what you need, when you need it
- Lower initial payments: Interest-only payments during draw period
- Revolving credit: Pay down and borrow again as needed
- Variable rates: Can benefit from falling interest rates
Ideal for:
- Home improvement projects with uncertain costs
- Emergency fund backup
- Ongoing expenses or investments
- When you want payment flexibility
When to Choose a Home Equity Loan
Advantages of Home Equity Loans:
- Predictable payments: Fixed monthly payments for budgeting
- Fixed interest rate: Protection against rate increases
- Lump sum: Immediate access to full amount
- Simpler structure: No draw/repayment periods to manage
Ideal for:
- Major one-time expenses (roof replacement, major renovation)
- Debt consolidation with known amounts
- When you prefer predictable payments
- When you need the full amount immediately
Cost Comparison Example
Let's compare costs for a $100,000 home equity financing:
HELOC Example
- Credit Limit: $100,000
- Interest Rate: 5.5% variable
- Draw Period: 10 years (interest-only)
- Repayment Period: 15 years
- Draw Period Payment: $458/month (on $100k balance)
- Repayment Payment: $817/month
Home Equity Loan Example
- Loan Amount: $100,000
- Interest Rate: 6.0% fixed
- Term: 15 years
- Monthly Payment: $843/month (fixed)
- Total Interest: $51,740
Factors to Consider
1. Your Financial Situation
- Income stability: Fixed payments vs. variable payments
- Cash flow: Need for flexibility vs. predictability
- Risk tolerance: Variable rates vs. fixed rates
2. Purpose of the Loan
- One-time expense: Home equity loan may be better
- Ongoing projects: HELOC provides more flexibility
- Emergency backup: HELOC offers revolving credit
3. Interest Rate Environment
- Rising rates: Fixed-rate home equity loan may be safer
- Falling rates: Variable-rate HELOC may be beneficial
- Uncertainty: Consider your risk tolerance
Making Your Decision
Decision Framework
Choose HELOC if:
- You need flexibility in borrowing amounts
- You're comfortable with variable payments
- You have ongoing or uncertain expenses
- You want to minimize initial payments
Choose Home Equity Loan if:
- You need a specific amount upfront
- You prefer predictable, fixed payments
- You want protection from rate increases
- You have a one-time major expense
Frequently Asked Questions
Can I have both a HELOC and a home equity loan?
Yes, you can have both, but your total home equity debt cannot exceed your available equity. Most lenders limit total home equity debt to 80-90% of your home's value.
Which has lower interest rates?
HELOCs typically have lower initial rates, but they're variable and can increase. Home equity loans usually have slightly higher fixed rates but provide rate stability.
Can I convert a HELOC to a home equity loan?
Some lenders offer conversion options, but this typically requires refinancing. Check with your lender about available options.
Calculate Your Options
Use our free HELOC calculator to estimate payments and compare different scenarios to help make your decision.
Calculate HELOC Payments