Both let you borrow against your home's equity, and both usually beat credit card and personal loan rates by a wide margin. The difference is the shape of the borrowing: a HELOC is a reusable credit line with a variable rate, while a home equity loan is a one-time lump sum with a fixed rate. Which one fits depends almost entirely on how you plan to spend the money.
A home equity loan works like a second mortgage. You borrow a fixed amount at closing, at a fixed rate, and repay it in equal monthly installments over 5 to 30 years. Predictable from day one.
A HELOC (home equity line of credit) is closer to a credit card secured by your house. You get a credit limit and a draw period, usually 5 to 10 years, during which you can borrow, repay, and borrow again. Minimum payments during the draw are typically interest-only. When the draw ends, a repayment period of 10 to 20 years kicks in and whatever you owe amortizes into principal-and-interest payments. HELOC rates float with the prime rate, so your cost can change with the market.
Lenders on both products generally cap total borrowing (your first mortgage plus the equity product) at 80% to 85% of the home's value. Both put your house on the line if you default.
Here's where the two products feel completely different in practice. Borrow $50,000 at 8.5% on a HELOC and your draw-period payment is just $354 a month, because it's interest only. When the draw ends and the balance amortizes over 20 years, the payment jumps to $434. Hold the full balance the whole time and total interest across both phases lands near $96,600, more than you borrowed.
A $50,000 home equity loan at a fixed 8.5% over 15 years costs about $492 a month from the start. Higher payment, but principal shrinks from month one and the rate can never spike on you.
That low HELOC draw payment is the seduction and the trap. It feels cheap for a decade, then the balance is still fully intact and the clock starts. If you take a HELOC, treating it like an amortizing loan and paying principal voluntarily changes the entire outcome.
Enter an amount and rate to see your interest-only payment, the repayment-phase jump, and total interest across both.
HELOC Payment Calculator →HELOCs are often cheap to open. Many lenders waive closing costs entirely, charging maybe a $50 to $100 annual fee, with a clawback if you close the line within about three years. Home equity loans look more like a mortgage closing: origination, appraisal, and title work that can run 2% to 5% of the amount borrowed.
One more alternative deserves a mention: the cash-out refinance, which replaces your entire first mortgage. If your existing mortgage rate is higher than today's rates, that can beat both equity products; run your numbers through a mortgage calculator to compare. If you're sitting on a low fixed rate from a few years back, don't touch it, and borrow the extra with a HELOC or home equity loan instead.
For a project with a fixed contract price, the home equity loan's lump sum and fixed payment are hard to beat. For phased work or projects where costs are uncertain, the HELOC wins because you only borrow, and only pay interest on, what you actually spend as each phase happens.
Usually far less than a mortgage. Many lenders offer no-closing-cost HELOCs, though they may charge an annual fee of $50 to $100 and claw back waived costs if you close the line within three years. Home equity loans more often carry 2% to 5% in closing costs, similar to a mortgage.
Yes, and during the draw period it's especially useful: pay the balance down and your available credit springs back, ready to borrow again. Watch for early-closure fees if you terminate the whole line within the first few years, but simply carrying a zero balance is normally free.
Yes. Both are secured by your home, so sustained default can end in foreclosure just like missing mortgage payments. That's exactly why their rates beat credit cards and personal loans. Borrow against your house only for things you'd be comfortable defending to your future self.