You’ve built up equity in your home and now you want to put it to work. Maybe you’re renovating the kitchen, consolidating credit card debt, or covering a big expense. Two options keep coming up: a home equity loan and a HELOC. They sound similar, but they work very differently — and choosing the wrong one can cost you money.
Here’s the difference in plain terms, plus guidance on when each one makes sense.
Home Equity Loan: The Lump Sum
A home equity loan gives you a fixed amount of money all at once. You borrow a set amount — say $50,000 — and start repaying it immediately with fixed monthly payments over a set term, usually 5 to 30 years. The interest rate is locked in at closing and never changes.
Think of it like a second mortgage. You get the money, you know exactly what your payment will be every month, and you pay it off on a schedule. Simple, predictable, done.
Best for: One-time expenses with a known cost. A kitchen remodel with a contractor quote, paying off $40,000 in credit card debt, covering a wedding or college tuition bill. Anything where you know exactly how much you need upfront.
HELOC: The Credit Line
A HELOC (Home Equity Line of Credit) works more like a credit card secured by your home. The lender approves you for a maximum amount — say $75,000 — and you can draw from it as needed during a “draw period” that typically lasts 5 to 10 years.
During the draw period, you only pay interest on what you’ve actually borrowed, not the full amount available. If you’re approved for $75,000 but only use $20,000, you only pay interest on $20,000. You can borrow, repay, and borrow again — just like a credit card.
After the draw period ends, the repayment period kicks in (usually 10 to 20 years), and you can no longer borrow. You repay what you owe with monthly payments.
The catch: most HELOCs have variable interest rates. Your rate — and your payment — can go up or down depending on market conditions. When the Fed raises rates, your HELOC payment goes up. When rates drop, it goes down.
Best for: Ongoing or unpredictable expenses. Home renovations where costs come in phases, emergency funds you hope not to use, or situations where you might need access to cash over time but don’t want to borrow it all at once.
Key Differences at a Glance
Interest rate: Home equity loans are fixed. HELOCs are usually variable. This is the biggest practical difference. With a home equity loan, your payment never changes. With a HELOC, it can fluctuate monthly.
How you get the money: Home equity loan = lump sum at closing. HELOC = draw as needed over time.
Repayment: Home equity loan payments start immediately with both principal and interest. HELOC payments during the draw period are often interest-only (though you can pay more), with full principal and interest payments kicking in during the repayment period.
Flexibility: HELOCs win here. You can borrow what you need, when you need it, and only pay interest on what you use. Home equity loans are all or nothing.
Predictability: Home equity loans win. You know your rate, your payment, and your payoff date from day one. HELOCs have moving parts that can surprise you.
What About Rates in 2026?
As of early 2026, home equity loan rates are running in the 7.5% to 9% range for well-qualified borrowers. HELOC rates are similar but can start lower — some introductory rates are in the 6% range — before adjusting upward.
If you think rates are going to drop over the next few years, a HELOC’s variable rate could work in your favor. If you want certainty regardless of what happens with rates, lock in a home equity loan.
How Much Can You Borrow?
Both products typically let you borrow up to 80-85% of your home’s value, minus what you still owe on your mortgage. This is called your combined loan-to-value ratio (CLTV).
Example: Your home is worth $400,000 and you owe $250,000 on your mortgage. At 80% CLTV, you could borrow up to $70,000 ($400,000 × 80% = $320,000, minus $250,000 owed = $70,000 available).
Your actual approval depends on your credit score, income, debt-to-income ratio, and the lender’s specific requirements. Shopping multiple lenders is important — rates and terms vary significantly.
The Tax Angle
Interest on home equity loans and HELOCs is tax-deductible — but only if you use the money to “buy, build, or substantially improve” the home that secures the loan. Using it for debt consolidation, tuition, or a vacation? The interest isn’t deductible.
This is a change from pre-2018 rules. Consult your tax advisor for specifics on your situation.
The Bottom Line
If you need a specific amount for a specific purpose and want predictable payments, get a home equity loan. If you want flexible access to funds over time and are comfortable with rate variability, get a HELOC.
Either way, remember: you’re putting your home up as collateral. If you can’t make the payments, the lender can foreclose. Borrow only what you can comfortably repay, and make sure the use of funds justifies the risk.
Related: What Is Home Equity and Why It Matters More Than You Think
See also: How a Home Appraisal Affects Your Equity, Refinance, and Sale Price
