HELOC vs. Home Equity Loan: Pros, Cons, and How to Choose

What is Home Equity?

Home equity is the portion of your home's value that you truly own—it's the difference between your home's market value and the outstanding balance on your mortgage.

For example:  If your home is worth $100,000 and you owe $80,000 on your mortgage, your equity is $20,000.

Your equity increases over time as:

• You pay down your mortgage
• Your home appreciates in value
• You make home improvements that boost market value

Homeowners often borrow against this equity through a HELOC or a home equity loan, using the funds for renovations, debt consolidation, or large expenses like education or travel.

What is a Home Equity Loan?

A home equity loan (also called a second mortgage) provides a lump sum of your borrowed funds upfront, repaid over a fixed term with a fixed interest rate. This makes budgeting easier, as monthly payments remain consistent throughout the loan term.

Key Features:

• Fixed interest rate
• Predictable monthly payments
• Best for one-time expenses (e.g., home remodels, debt consolidation)
• Longer timeline: may take 2–3 weeks to close due to disclosures and waiting periods
  
  

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

A HELOC, or home equity line of credit, is a revolving credit line. You can borrow what you need, when you need it—similar to a credit card—with a variable interest rate.

Key Features:

• Variable interest rate (subject to change)
• Flexible access during the draw period (typically 5 or 10 years)
• May feature introductory rates
• Interest-only payments during the draw period, followed by full repayment phase

Because of its flexibility, a HELOC is ideal for ongoing expenses like phased renovations or unpredictable costs.

HELOC vs Home Equity Loan:  Side-by-Side Comparison Table

 

Product	HELOC	Home Equity Loan
Type	Revolving line of credit	Lump-sum loan
Interest Rate	Variable	Fixed
Repayment	Monthly payments vary based on balance and rate	Equal monthly payments
Term	Draw period (5–10 years) + repayment period	Fixed term (5–7 years)
Best For	Ongoing or variable expenses	One-time large expenses
Pros	Pay interest only on what you use; flexible access	Fixed rate and predictable payments
Cons	Rates and payments can change; risk of balloon payment	Slower closing due to regulations

 

How to Decide:  HELOC vs Home  Equity Loan?

Here are some questions to help guide your choice:

• Do you need all the money upfront? → Choose a home equity loan
• Do you need flexibility over time? → Consider a HELOC
• Do you prefer fixed monthly payments? → A home equity loan is more predictable
• Are you comfortable with a variable rate? → A HELOC may work well

Also take into account:

• Your credit score and income stability
• Whether you're comfortable managing variable interest rates
• Your long-term financial goals (e.g., moving, refinancing)

Risks to Consider

Both a HELOC and a home equity loan are secured by your home. Failure to repay could lead to foreclosure.

Additional risks:

• HELOC interest rates may increase, raising your monthly payments
• Home equity loans start accruing interest immediately
• Both loans create a second lien on your property
• If home values drop, you may owe more than your home is worth

Conclusion:  HELOC vs Home Equity Loan – Which One is Better?

The choice between a HELOC vs home equity loan comes down to your specific financial needs:

• If you want predictability and have a specific large expense in mind, a home equity loan may be the better choice.
• If you need flexibility over time and can manage variable rates, a HELOC offers more control.

Always evaluate your budget, repayment ability, and talk to a financial advisor or your banker before deciding.

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FAQs

Can I have both a HELOC and a home equity loan?

Yes, if you have sufficient home equity. However, if you're seeking additional funds after getting one loan, consolidating into a single product may be smarter. Consult your banker about the best strategy.

How does a HELOC affect my credit score?

Applying for a HELOC involves a credit check. Once approved, the HELOC appears as a revolving account on your credit report. Responsible usage and timely payments can have a positive impact on your credit score.