What’s the difference between a HELOC and a home equity loan?

If you’re like millions of other Americans, you’re probably sitting on more home equity than you think — and that number generally goes up every year as your home value rises and your mortgage balance decreases. The equity in your home is more than just a line on your real estate portfolio; it also has many advantages if you need to borrow money.  

Home equity loans and home equity lines of credit (HELOCs) are two of the most common tools that people use to tap into their home equity. There are many similarities between these options, but there are many distinctions, too — and that may impact whether one is better for you than its sibling. We’ll cover the difference between home equity loans and lines of credit to help you choose.

What is a HELOC?

A home equity line of credit (HELOC) is a revolving line of credit secured by the equity in your home. It works much like a credit card in that you're approved for a certain credit limit and can borrow up to that limit as needed.

Key features:

• Draw period: Typically, a HELOC has a draw period (usually 5-10 years), during which you can borrow money and make interest-only payments.
• Repayment period: After the draw period, the HELOC enters the repayment phase, where you start paying both principal and interest, which can last 10-20 years.
• Variable interest rates: Most HELOCs have variable interest rates, meaning the interest rate can fluctuate over time based on market conditions, typically following the prime rate.

What is a home equity loan?

A home equity loan allows you to borrow against your equity for a single lump-sum payout. You receive the entire amount all at once and must begin paying both principal and interest nearly immediately.

Key features:

• Fixed interest rates: Home equity loans usually have fixed interest rates, which means your payments will stay consistent throughout the life of the loan.
• Set loan term: The repayment period for a home equity loan is usually fixed and can range from 5 to 30 years.

What’s the difference between an equity line of credit and an equity loan?

Although HELOCs and home equity loans both allow you to tap into your equity, the methods of borrowing vary greatly. 

Payout

The biggest difference is how you receive funds. A home equity loan offers all the funds at once, similar to a personal loan. A HELOC, however, allows you to draw against a line of credit over time. 

Interest rates

Home equity loans offer fixed rates. HELOCs, on the other hand, come with variable interest rates that can cause your monthly payment and overall borrowing costs to fluctuate over time. 

Ongoing fees

As long as you make on-time payments, you won’t typically have to worry about other fees with a home equity loan. HELOCs, on the other hand, may charge additional annual maintenance fees and separate draw fees. 

Repayment structure

Home equity loans are paid off over the course of five to 30 years with a series of equal payments. In contrast, HELOCs are split up into two parts: an interest-only draw period lasting five to 10 years, and a 10 to 20-year repayment period. 

Monthly payment amount

Home equity loan payments won’t change over the course of the loan, making it easy to plan in your budget. HELOC payments may constantly change due to the variable rate and the shift in payments from the draw to repayment phases. 

HELOC vs. home equity loan

Both HELOCs and home equity loans:

• Offer no restriction on how you can use the funds.
• Have appraisal fees and closing costs you'll need to cover.
• Result in a lien on your property.
• May be tax deductible if used for home improvements.
• Use your home as collateral, and can result in foreclosure if you default on the loan.

So, choosing between the two largely depends on your financial situation and how you plan to use the funds.

• Choose a HELOC if you need flexibility and ongoing access to funds over time. A HELOC is ideal for projects or expenses that are spread out, like home improvements or educational costs.
• Choose a home equity loan if you need a lump sum of money for a large, one-time expense and want predictable payments with a fixed interest rate. A home equity loan is a great option for consolidating debt or making substantial home renovations.

Alternative equity products

Home equity loans and HELOCs are two of the most popular ways to tap into your home equity, but they’re not your only options. Before you settle on one or the other, explore a:

Cash-out refinance

A cash-out refinance is similar to any other mortgage refinance, except you borrow a larger loan amount than what you owe. In return, you get the excess money back as loan funds that you can use for whatever you need. You can think of a cash-out refinance as rolling your new loan in with your existing mortgage, rather than keeping them as separate debts as with a home equity loan or HELOC. 

You’ll be paying off those funds for a longer period, which can drive up the overall amount of interest you pay. If you’re able to refinance your mortgage for a lower interest rate or a smaller monthly payment, it may be worth it. 

‍Home equity investment (HEI)

A home equity investment (HEI), on the other hand, allows you to access funds now in exchange for a future portion of your home equity. Because an HEI is an investment, it does not require any monthly payments. You’ll repay the funding in one balloon payment in 10 or 30 years, or sooner if you sell your home or decide to repay early. 

Because your HEI repayment is tied to the appreciation of your home, your buyback costs will vary based on how well your home does. Some HEI providers, such as Point, offer a Homeowner Protection Cap that places limits on the amount you have to repay in the event of major home appreciation. An HEI comes with less stringent qualification requirements than a HELOC or home equity loan — a credit score above 500 and sufficient equity are needed to qualify. There are no income or debt-to-income (DTI) ratio requirements.

Reverse mortgage

A reverse mortgage is a type of loan that allows homeowners aged 62 and older to leverage the equity in their home into cash. With a reverse mortgage, the lender makes payments to the homeowner — via monthly payments, a single lump sum payment, or a flexible credit line.

The loan is repaid when the homeowner sells the home, moves out permanently, or passes away. The amount owed is typically paid from the proceeds of the sale of the home, and in most cases, the homeowner or their heirs will not owe more than the home's value at the time of sale. Reverse mortgages come with various restrictions, so it’s best to explore the pros and cons before proceeding.

Final thoughts

The difference between a home equity loan and line of credit seems fairly straightforward at first, but the more you dig into it, the more factors there are to consider. In general, financial experts recommend tapping into your home equity if it’ll raise your home value further, although it may also be useful in other cases, such as debt consolidation.