A HELOC (Home Equity Line of Credit) is a revolving line of credit you draw from as needed, like a credit card. A home equity loan is a lump-sum loan with fixed payments. HELOCs have variable rates; home equity loans typically have fixed rates. Both use your home as collateral.
The right choice depends on whether you need flexible access to funds over time or a single lump sum for a specific expense.
HELOC -- Revolving Credit, Variable Rate
A HELOC works like a credit card secured by your home. You get a maximum credit limit and draw only what you need, when you need it. During the draw period (typically 10 years), you can borrow, repay, and borrow again. Payments are interest-only during the draw period, then fully amortizing during repayment.
- Variable rate: Interest rates fluctuate with the prime rate, so payments can increase over time.
- Flexible borrowing: Draw only what you need, when you need it. Interest accrues only on the amount you draw.
- Good for ongoing projects: Ideal for renovations paid out over time, education expenses, or variable income needs.
Home Equity Loan -- Lump Sum, Fixed Rate
A home equity loan gives you the full amount upfront as a lump sum with a fixed interest rate and fixed monthly payments. It functions like a second mortgage with its own repayment term (typically 10 to 20 years). You receive the entire amount at closing and begin repaying immediately.
- Fixed rate: Your interest rate and monthly payment are locked at closing and never change.
- Predictable payments: You know exactly what you owe every month for the life of the loan.
- Good for one-time expenses: Ideal for a single major expense like a roof replacement, major repair, or debt consolidation.
When to Use Each
Choose a HELOC when you have ongoing projects or variable expenses over time, like renovations you are doing in phases or education costs spread over multiple semesters. Choose a home equity loan when you need a specific lump sum for a defined purpose, like replacing a roof, consolidating high-interest debt, or making a major purchase.
Risks of Both
Both products use your home as collateral. If you cannot make payments, you risk foreclosure. A HELOC's variable rate means your payment could increase significantly in a rising rate environment. A home equity loan's fixed payment provides certainty but locks you into that payment regardless of your income situation.
Qualification Requirements
For both products, lenders typically require at least 15-20% equity remaining after the loan, a credit score of 680+, and a debt-to-income ratio of 43% or less. You will need income documentation, an appraisal, and a title search. Closing costs range from 2-5% of the loan amount.
