Home Equity Loan vs HELOC: Which One Is Right for You?

If you’re a homeowner exploring ways to tap into your equity, you’ve likely heard about home equity loans and HELOCs. But how do they compare — and which one is best for your financial goals?

In this guide, we’ll explain the difference between a home equity loan vs HELOC, how each works, and when one might make more sense than the other.

What Is a Home Equity Loan?

A home equity loan is a fixed-term, lump-sum loan that allows you to borrow against the equity you’ve built in your home. You receive the funds all at once and repay them over time with fixed monthly payments.

Think of it like a second mortgage — your home is the collateral, and your loan amount is typically capped at 80%–85% of your home’s value minus your mortgage balance.

What Is a HELOC?

A HELOC, or Home Equity Line of Credit, is a revolving credit line — similar to a credit card — secured by your home. You’re approved for a maximum limit and can borrow as needed during a draw period (usually 5–10 years).

You only pay interest on what you borrow, and most HELOCs have variable interest rates. After the draw period ends, you enter a repayment period (often 10–20 years) where you can no longer borrow and must repay both principal and interest.

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

*Always consult a tax advisor to confirm eligibility.

When to Use a Home Equity Loan

A home equity loan makes sense when you need a specific amount for a one-time project or purchase, such as:

• Major home renovations (kitchen, roof, etc.)

• Debt consolidation at a lower fixed rate

• Medical bills or major tuition expenses

• Purchasing a second property or investment

Since the payments and interest rate are fixed, it’s a good option when budgeting certainty is important.

When to Use a HELOC

A HELOC is ideal if you want flexible access to funds over time, especially if:

• You have ongoing or phased renovation projects

• You’re not sure how much money you’ll need

• You want a backup line of credit for emergencies

• You’re comfortable with variable interest rates

Many homeowners use HELOCs like a credit buffer — drawing and repaying as needed without taking on a large balance upfront.

Pros and Cons of Each Option

Home Equity Loan Pros

• Predictable monthly payments

• Fixed interest rate

• Easier to budget long-term

Home Equity Loan Cons

• Must borrow full amount upfront

• No flexibility once issued

• Interest starts accruing immediately

HELOC Pros

• Flexible borrowing during draw period

• Pay interest only on what you use

• Often lower initial payments

HELOC Cons

• Variable interest rates = unpredictable costs

• Risk of overspending

• Lump-sum repayment can cause payment shock

Key Questions to Ask Before Choosing

Before choosing a home equity loan vs HELOC, ask yourself:

• Do I know exactly how much I need?

• Do I prefer a fixed or variable interest rate?

• Can I handle fluctuating payments?

• Is this a one-time cost or ongoing expense?

• Am I confident I’ll repay on time to avoid foreclosure risk?

If you’re not sure which one fits your needs, Loan Compass can analyze your financial profile and help you compare the best loan types for your situation.

FAQ: Home Equity Loan vs HELOC