In this guide
Key differences at a glance
Both products let you borrow against your home's equity — but they work very differently. Here is the complete side-by-side comparison:
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| How funds are received | Draw as needed up to limit | Full lump sum at closing |
| Interest rate type | Variable (tied to Prime Rate) | Fixed for life of loan |
| Monthly payment | Varies with rate and balance | Fixed — same every month |
| Interest charged on | Amount drawn only | Full loan amount from day 1 |
| Repayment flexibility | High — repay and redraw | Low — fixed schedule |
| Draw period | Yes — typically 5–10 years | No — one disbursement |
| Rate risk | Higher — rate can rise with Fed | None — rate is locked |
| Best for | Ongoing or uncertain costs | Single, known large expense |
| Typical term | 20–30 years total | 5–30 years |
| Closing costs | $0 — $1,500 | $500 — $3,000+ |
How a HELOC works
A HELOC gives you a revolving credit line — similar to a credit card — up to a maximum limit determined by your home equity and creditworthiness. During the draw period (typically 5–10 years) you can borrow, repay, and reborrow freely. You only pay interest on what you have actually drawn.
After the draw period ends, the HELOC converts to a repayment period (typically 10–20 years) where you repay the outstanding balance with principal and interest payments. Because the rate is variable, your payments can change over time with movements in the Prime Rate.
For a full explanation of how HELOCs work step by step, see our How a HELOC Works guide.
How a home equity loan works
A home equity loan — sometimes called a second mortgage — gives you a single lump sum of money at closing, at a fixed interest rate, repaid over a set term with equal monthly payments. The rate and payment are locked in from day one and never change.
You begin paying interest on the full loan amount immediately after closing — regardless of whether you have spent the money. This makes a home equity loan more expensive than a HELOC if you do not need all the funds upfront.
Rates — variable vs fixed
The rate structure is one of the most important differences between the two products:
| Feature | HELOC Variable Rate | Home Equity Loan Fixed Rate |
|---|---|---|
| Tied to | US Prime Rate | Treasury yields / lender margin |
| Starting rate | Usually lower than fixed | Usually slightly higher than HELOC |
| Rate changes | Monthly or quarterly | Never — fixed for life |
| Benefits from rate cuts | Yes — automatically | No — would need to refinance |
| Risk in rising rate env. | Higher — payment increases | None — fully protected |
| Payment certainty | Low | High |
In a falling rate environment (Fed cutting rates), a HELOC benefits automatically as your rate drops each cycle. In a rising rate environment, a fixed-rate home equity loan protects you completely. The right choice depends partly on your view of where rates are heading — and your tolerance for payment uncertainty.
Payment comparison — real example
Here is how payments compare on a $75,000 borrowing need at current rates:
| Scenario | HELOC | Home Equity Loan |
|---|---|---|
| Amount borrowed | $75,000 | $75,000 |
| Interest rate | 9.25% (variable) | 9.75% (fixed) |
| Draw period payment | ~$578/mo (interest only) | N/A — full payment from day 1 |
| Repayment payment (20yr) | ~$680/mo | ~$710/mo (20yr fixed) |
| Interest if you only use $40k | Based on $40k drawn | Based on full $75k from day 1 |
| Payment certainty | Low — changes with rates | High — same every month |
When to choose a HELOC
A HELOC is usually the better choice when:
Phased home renovation
Costs are spread over time — draw only what you need at each stage rather than paying interest on the full budget from day one.
Emergency fund backup
Open the line and leave it undrawn. Pay nothing until you actually need it — a zero-cost safety net.
Uncertain total cost
When you do not know exactly how much you will need — a HELOC lets you draw what you use rather than guessing upfront.
Rates expected to fall
If the Fed is cutting rates, a variable HELOC automatically benefits — your payment falls without any action needed.
When to choose a home equity loan
Single large known expense
A specific project with a known cost — kitchen remodel, roof replacement, medical procedure — where you need the full amount upfront.
Debt consolidation
Paying off a specific list of debts at closing — a lump sum at a fixed rate makes budgeting simple and certain.
Need payment certainty
Fixed income, tight budget, or you simply prefer knowing exactly what you owe every month for the life of the loan.
Rising rate environment
Lock in today's rate before it rises further. A fixed home equity loan is fully protected from Fed rate hikes.
Costs and fees compared
| Cost | HELOC | Home Equity Loan |
|---|---|---|
| Closing costs | $0 — $1,500 (often waived) | $500 — $3,000+ |
| Annual fee | $50 — $100/yr (some lenders) | None typically |
| Early closure fee | $0 — $500 (within 2–3 yrs) | Prepayment penalty (check terms) |
| Appraisal | $300 — $700 | $300 — $700 |
| Ongoing interest | On drawn balance only | On full loan from day 1 |
Tax deductibility
Both HELOCs and home equity loans may offer tax advantages — but only under specific conditions under current IRS rules:
- Interest IS potentially deductible if the funds are used to buy, build, or substantially improve the home that secures the loan
- Interest is NOT deductible if funds are used for debt consolidation, personal expenses, vacations, or other non-home purposes
- Loan limit: Interest is deductible on up to $750,000 of combined home acquisition debt (for loans taken after December 2017)
Tax rules change and individual circumstances vary significantly. Consult a qualified tax professional before making any borrowing decision based on potential deductibility. Do not assume deductibility without professional guidance specific to your situation.