When you’ve built up equity in your home, that value can become a powerful financial tool. Two of the most common ways to access it are home equity loans and home equity lines of credit (HELOCs).
Although both allow you to borrow against your home’s value, they work very differently — and the right choice depends on your goals, spending habits, and financial situation.
In this guide, we’ll break down the differences, pros, and cons of each option to help you make an informed decision.
💡 What Is Home Equity?
Your home equity is the difference between your home’s market value and what you still owe on your mortgage.
For example:
If your home is worth $400,000 and your mortgage balance is $250,000, you have $150,000 in equity.
Lenders typically allow you to borrow up to 80–85% of your home’s value, minus what you owe on your mortgage.
🏠 What Is a Home Equity Loan?
A home equity loan is sometimes called a second mortgage. It lets you borrow a lump sum of money upfront, which you repay in fixed monthly installments over a set period (often 5–30 years).
- 💰 Loan Type: Lump sum
- 📅 Interest Rate: Fixed
- 💵 Repayment: Equal monthly payments
✅ Pros
- Predictable payments (great for budgeting)
- Fixed interest rates protect you from market fluctuations
- Ideal for large, one-time expenses like home renovations or debt consolidation
⚠️ Cons
- Less flexibility — you get all the money at once
- You start paying interest on the full amount immediately
- Early repayment might come with penalties
🔄 What Is a HELOC?
A Home Equity Line of Credit (HELOC) works more like a credit card secured by your home.
Instead of receiving one lump sum, you get access to a revolving line of credit that you can draw from as needed — usually over a 10-year “draw period.”
- 💰 Loan Type: Revolving line of credit
- 📅 Interest Rate: Variable (can fluctuate over time)
- 💵 Repayment: Pay interest-only during the draw period; principal plus interest after
✅ Pros
- Flexibility — borrow only what you need, when you need it
- Pay interest only on the amount you use
- Can be reused during the draw period as you repay
⚠️ Cons
- Variable rates can increase your payments over time
- Harder to budget if your rate changes
- Risk of overspending due to easy access to funds
📊 Quick Comparison: Home Equity Loan vs. HELOC
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Type | Lump-sum loan | Revolving credit line |
| Interest Rate | Fixed | Variable |
| Payment Type | Fixed monthly payments | Payments vary with usage |
| Best For | One-time large expenses | Ongoing or unpredictable expenses |
| Draw Period | N/A | Typically 5–10 years |
| Tax Deductibility | May be deductible if used for home improvements | Same — only if used for home improvements |
💬 Which Option Is Right for You?
| Your Situation | Better Option |
|---|---|
| You want a fixed, predictable payment | Home Equity Loan |
| You plan to borrow multiple times for flexible needs | HELOC |
| You’re consolidating debt | Home Equity Loan |
| You want access to cash for emergencies or home upgrades over time | HELOC |
🧭 Final Thoughts
Both home equity loans and HELOCs can unlock the value in your home and help you reach your financial goals. The right choice depends on whether you prefer stability or flexibility.
Before applying, make sure to:
- Compare rates from multiple lenders
- Understand all fees and repayment terms
- Consider your ability to repay if interest rates rise
With careful planning, tapping into your home equity can be a smart, strategic move — not just another loan.