Both home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the value of your home, but their exact terms vary.
If you’re looking for a way to borrow money – whether you need to fund a home renovation, consolidate debt or pay for an emergency expense – you may wonder if the equity you have built in your home is useful. You’ve been paying your mortgage responsibly, so can you tap into that equity to fund other purchases?
The good news is there are multiple ways to borrow funds against your home equity, including both home equity loans (HELs) and home equity lines of credit (HELOCs). Both are often lower-cost borrowing options than alternatives, coming with more favorable interest rates than personal loans. But these two types of loans differ and are better for different kinds of borrowers.
“A home-equity loan provides a lump sum of money at a fixed rate, while a home equity line of credit provides ongoing access to funds for flexible repayment options,” explained Werner Loots, executive vice president of consumer lending at U.S. Bank.
While a home-equity loan is a one-time withdrawal you pay back in equal installments, HELOCs are revolving credit lines (like a credit card) you can pull from over a set period. We chatted with Loots and other financial experts to learn more about the differences between these two loan options and help you determine which is the best choice for you.
- What is a HELOC?
- Pros
- Cons
- See All 12 Items
What is a HELOC?
A home equity line of credit or HELOC, is a flexible borrowing option that uses the equity you have built in your home to access funds for home repairs, debt consolidation or other large purchases.
Similar to a credit card, HELOCs are revolving credit lines from which you can withdraw money on multiple occasions during the HELOC draw period.
“A HELOC offers ongoing access to funds at rates lower than most credit cards,” said Loots. “If you’re not sure exactly how much money you’ll need and when and are OK with rates and payments changing over time, a HELOC offers [more] flexibility.”
During your HELOC draw period, you as the borrower are typically responsible for paying only the interest on the amount you’ve withdrawn. A repayment period starts after your HELOC draw period ends and you pay back what you borrowed plus applicable interest.
“While some lenders (including Achieve) are now offering fixed-rate HELOCs, most HELOCs are variable-rate, meaning that the rate – and therefore the monthly payment – can vary over the loan’s term,” said Kyle Enright, president of Achieve, a digital personal finance company in San Mateo, California.
A HELOC is a secured loan, meaning that your home is collateral. So if you miss your payments, you run the risk of foreclosure and losing your home. Because of this, it is important to borrow no more than you can afford to pay back, even if you are extended a large line of credit.
Pros
- Flexible line of credit you can pull from multiple times during your draw period
- Fixed-rate options available, though variable interest rates are more common
- More affordable borrowing option than a credit card and some other types of loans
Cons
- Variable interest rates can lead to high payments if rates change
- Home serves as collateral, so you could lose your home if you don’t pay back what you owe
- Flexible line of credit could serve as a temptation to overborrow
What is a Home-Equity loan?
Like a HELOC, a home-equity loan is a secured loan that uses your home as collateral. The equity you’ve built in your home is also the baseline for how much you can borrow; though unlike a HELOC, HELs offer one set amount of money upfront, followed by fixed repayments.
“Home equity loans provide homeowners with a set amount of money and an interest rate fixed for the entire term of the loan. That means the payments will not change for the life of the loan,” explained Enright.
HELs offer less flexibility than HELOCs since you have to know exactly how much you plan to borrow upfront. On the flip side, however, repayments are more predictable and fixed interest rates can result in less owed over the life of the loan.
Pros
- Straightforward repayment plan with fixed interest rate
- More affordable borrowing option than other kinds of loans
Cons
- One-time loan offers less flexibility than a line of credit
- Home serves as collateral, so you could lose your home if you fail to repay what you owe
HELOC vs Home Equity Loan
| Home equity loans | Home equity lines of credit | |
| Type of credit | Fixed | Revolving |
| APRs | Fixed | Fixed or variable |
| Other terms | Pay interest on entire balancePotential tax benefits if you use for certain purchasesRepayment begins immediately on interest and principal | Pay interest on what you borrowPotential tax benefits if you use for certain purchasesRepayment on interest only during draw period, followed by repayment of interest and principal afterward |
How to Choose Between a HELOC and Home Equity Loan
Now that you understand the difference between a HELOC and a HEL, you can better decide which might be your best choice. According to Enright, home equity loans are best for borrowing money when you have a clear plan for how to spend it, as you’ll know exactly how much you need. Plus, fixed interest and payments make repayment planning easier and remove the temptation to overdraw your available credit.
Meanwhile, he added that someone who doesn’t know exactly when they need the money or how much (like when you’re doing a home renovation project with an uncertain budget) may appreciate the flexibility of a HELOC. If you can handle the payments associated with a changing rate and avoid borrowing more than you can repay, HELOCs can still be a great option.
“The one interesting caveat is the fixed-rate option within the HELOC, which combines the best of both worlds – it creates a flexible borrowing facility and also lets you choose to draw that down in ‘chunks’ that you can choose to fix at that point,” said Loots.
“For example, you may have a $50K HELOC and choose to take out $10k in the form of a fixed-rate option, which would make that $10k function just like a HE Loan and still leave the additional borrowing capacity in the HELOC,” he explained. Just keep in mind that fixed-rate HELOCs may be more difficult to find and qualify for.
Alternatives to HELOCs and Home Equity Loans
While HELOCs and home equity loans can be affordable borrowing options, they are best for those with a fair amount of equity in their homes. If you are looking to borrow a sum of money and don’t have access to this kind of equity, other borrowing options can include:
- Personal loans or lines of credit: Personal loans or lines of credit are usually unsecured loans, meaning they don’t require collateral. That can make them more difficult to qualify for than home equity loans. However, many personal loans offer favorable fixed interest rates and relatively high sums, so they can be a good option if you don’t qualify for an HEL or HELOC.
- Credit cards: For some large purchases, you can use a credit card with a 0% introductory APR to pay off the balance over time before your regular interest rate kicks in. However, your credit limit will limit this option.
- Debt consolidation loans: If you’re looking for a way to consolidate debt, debt consolidation loans are designed specifically for this purpose. While rates and repayment terms may not be as favorable as some HELs or HELOCs, they are still a good choice for reducing your debt.
- The Bottom Line
HELOCs and home equity loans are both secured borrowing options that use your home as collateral, allowing you to tap into the equity you’ve built in your home to finance purchases like home repairs, medical expenses or debt consolidation. Choosing between the two borrowing options will come down to your preferred level of flexibility compared to repayment terms: HELOCs are more flexible, but variable interest can lead to higher payments, while HELs require more careful upfront planning but can be more affordable over time.
No matter what you choose, be sure to research rates and options carefully before applying for any loan and make a repayment plan.
Why You Should Trust Us
Emily Sherman has written about credit and loans – including HELs and HELOCs – for a variety of financial publications for the last seven years. Combined with her personal knowledge of these topics, she relies on industry experts in loans and borrowing options, including a VP of consumer lending at a major U.S. bank and president of lending at a top finance company to ensure all the information presented here is accurate.
FAQ
What is better, a HELOC or a home-equity loan?
Both kinds of loans are good borrowing options, but the better choice depends on your particular needs. Home equity loans can offer more predictable payments, thanks to fixed interest rates, but HELOCs offer more flexibility with an extended draw period on a line of credit.
How do I pick between a HELOC and a home-equity loan?
To choose between a HELOC and home equity loan, consider what you need to borrow money for and how you plan to pay it back. Do you have a fixed amount you need to access or will a flexible line of credit you can draw from on multiple occasions better serve your needs? You should also compare interest rates across both options to find the most favorable terms.
Sources
- Werner Loots, executive vice president of consumer lending at U.S. Bank
- Kyle Enright, president of lending at Achieve, a digital personal finance company in San Mateo, California.
About Emily Sherman Harding
Emily Sherman is a journalist with more than seven years of experience writing about personal finance, higher education, and business topics. Her work has been featured in publications including Buy Side from the Wall Street Journal, U.S. News & World Report, USA Today, and Forbes Advisor. When she’s not writing, you can find Emily curled up with a good book or planning her next vacation using points and miles.