What Is the Difference Between a HELOC and a Home Equity Loan?

When homeowners look to tap into the value of their home, they often encounter two popular options: a Home Equity Line of Credit (HELOC) and a Home Equity Loan. While both allow you to borrow against the equity you've built in your home, they serve different purposes and function in distinct ways. Understanding the key differences can help you make a smart financial decision that aligns with your goals.

What Is Home Equity?

First, a quick refresher: home equity is the difference between your home’s market value and what you owe on your mortgage. For example, if your home is worth $400,000 and you owe $250,000, your equity is $150,000. Lenders often allow you to borrow a portion of this equity, and that’s where HELOCs and home equity loans come in.

What Is a Home Equity Loan?

A home equity loan is often referred to as a second mortgage. It allows you to borrow a lump sum of money, which you repay over a set period of time with fixed monthly payments and a fixed interest rate.

Key Features:

• Lump-sum payment: You receive all the funds upfront.

• Fixed interest rate: Your monthly payments remain the same for the life of the loan.

• Best for: Large, one-time expenses (e.g., home renovations, debt consolidation, education costs).

Pros:

• Predictable monthly payments.

• Fixed interest rates provide stability.

• Ideal for those who know exactly how much they need to borrow.

Cons:

• You start repaying interest on the full amount right away.

• Less flexibility if your borrowing needs change.

What Is a HELOC (Home Equity Line of Credit)?

A HELOC works more like a credit card. It provides access to a revolving line of credit, allowing you to borrow what you need, when you need it, up to a set limit. You only pay interest on the amount you actually use.

Key Features:

• Revolving credit line: Borrow as needed during the draw period (usually 5–10 years).

• Variable interest rate: Payments may change based on market rates.

• Best for: Ongoing or unpredictable expenses (e.g., medical bills, home repairs, business startup).

Pros:

• Flexible access to funds.

• Pay interest only on the amount borrowed.

• Potentially lower interest rates (at least initially).

Cons:

• Variable rates can lead to higher payments over time.

• Requires discipline to avoid overspending.

• May include annual fees or maintenance charges.

Side-by-Side Comparison

Which One Is Right for You?

• Choose a Home Equity Loan if you need a specific amount of money and want the predictability of fixed payments.

• Choose a HELOC if you prefer flexible access to funds over time and are comfortable with a variable interest rate.

Before applying for either, consider your financial habits, how much you need, and whether your expenses are one-time or ongoing. It’s also wise to speak with a financial advisor or lender to compare options tailored to your specific situation.

Final Thoughts

Both HELOCs and home equity loans can be powerful financial tools when used wisely. They offer homeowners access to cash at generally lower interest rates than credit cards or personal loans, thanks to the backing of your home's equity. But with that opportunity comes responsibility—so be sure to borrow only what you need, and have a solid repayment plan in place.