If you own a home with significant equity, you have two primary ways to borrow against it: a HELOC (Home Equity Line of Credit) or a home equity loan. Both let you access your home's equity at rates far lower than personal loans or credit cards — but they work very differently. Choosing the wrong one can cost you thousands of dollars in unnecessary interest.
HELOC vs Home Equity Loan: Key Differences
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Interest Rate | Variable (adjusts with prime rate) | Fixed for life of loan |
| How You Receive Funds | Draw as needed (like a credit card) | Lump sum upfront |
| Draw Period | Typically 10 years | No draw period |
| Repayment Period | 10–20 years after draw period | 5–30 years fixed |
| Monthly Payments | Variable (interest-only during draw) | Fixed throughout loan |
| Best For | Ongoing or uncertain expenses | One-time large expenses |
| Current Rates (2026) | 7.50%–9.50% variable | 7.00%–9.00% fixed |
| Closing Costs | Lower (often waived) | Higher (1%–5% of loan) |
What Is a HELOC?
A HELOC (Home Equity Line of Credit) works like a credit card backed by your home. You're approved for a maximum credit limit based on your home's equity, and you can draw from that limit as needed during the draw period (typically 10 years). You only pay interest on the amount you've actually borrowed, not the full credit limit.
During the draw period, many HELOCs require interest-only payments, which keeps monthly costs low. After the draw period ends, you enter the repayment period (typically 10–20 years) where you pay both principal and interest. The interest rate on a HELOC is variable — it adjusts with the prime rate, which means your payments can go up or down over time.
When a HELOC Makes Sense
A HELOC is ideal for home renovation projects where costs are spread over time, ongoing expenses where you're not sure how much you'll need, or situations where you want the flexibility to borrow only what you need. The revolving credit structure means you can pay it down and borrow again during the draw period.
What Is a Home Equity Loan?
A home equity loan (sometimes called a "second mortgage") gives you a lump sum of money upfront, which you repay over a fixed term at a fixed interest rate. Your monthly payment stays the same for the entire life of the loan — making it easy to budget. Home equity loans typically have slightly higher closing costs than HELOCs, but the fixed rate provides certainty that a HELOC doesn't.
Home equity loans are best when you know exactly how much you need and want the predictability of a fixed payment. Common uses include debt consolidation, a major home renovation with a known budget, or paying for a large one-time expense like a wedding or college tuition.
When a Home Equity Loan Makes Sense
A home equity loan is ideal when you need a specific amount of money upfront, want a fixed interest rate that won't change, or prefer predictable monthly payments. It's particularly useful for debt consolidation — rolling high-interest credit card debt into a lower fixed-rate home equity loan can save thousands in interest.
How Much Can You Borrow?
Both HELOCs and home equity loans are limited by your home's equity and your lender's combined loan-to-value (CLTV) ratio requirements. Most lenders allow you to borrow up to 85% of your home's appraised value, minus what you still owe on your mortgage.
Example: If your home is worth $400,000 and you owe $200,000 on your mortgage, you have $200,000 in equity. At 85% CLTV, you could borrow up to $140,000 ($400,000 × 85% = $340,000 − $200,000 mortgage = $140,000).
HELOC vs Home Equity Loan: Which Has Lower Rates?
In 2026, home equity loan rates are typically slightly lower than HELOC rates because the fixed rate carries less risk for the lender. However, HELOCs often start lower and only become more expensive if rates rise. Given that the Federal Reserve has been cutting rates in 2025–2026, a HELOC could actually cost less over the long run if rates continue to fall.
Current average rates as of March 2026:
- HELOC: 7.50%–9.50% (variable, tied to prime rate)
- Home equity loan: 7.00%–9.00% (fixed)
- Personal loan (for comparison): 10.00%–24.00%
- Credit card (for comparison): 20.00%–29.00%
Important: Your Home Is Collateral
Both HELOCs and home equity loans use your home as collateral. If you default on payments, the lender can foreclose on your home. Only borrow what you can comfortably repay, and have a clear plan for how you'll use the funds and how you'll make payments if your financial situation changes.
Tax Deductibility
Interest on HELOCs and home equity loans may be tax deductible — but only if the funds are used to "buy, build, or substantially improve" the home that secures the loan. If you use a HELOC to pay off credit card debt or fund a vacation, the interest is generally not deductible. If you use it to add a bathroom or renovate your kitchen, it likely is deductible. Consult a tax professional for guidance specific to your situation.
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