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

A home equity line of credit (HELOC) is similar to a home equity loan. Both are considered a type of second mortgage and involve borrowing against your home’s equity. However, they have differences.  

This article will explore the differences between HELOC and a home equity loan to help you decide which financing option is right for you. 

What is HELOC?

A home equity line of credit is a type of loan. It allows you to borrow money using your home’s equity as collateral. Equity is the difference between the market value of your home and your remaining mortgage amount.  

In a HELOC loan application, lenders will have your home appraised. It will help them determine its current market value and the amount of equity you have. If you get approved, you will receive a credit line. Its limit is based on the assessed equity in your home. 

This loan arrangement works like a credit card, providing a revolving line of credit. You can borrow and repay as needed. 

There are two phases to HELOC:

1. Draw period: During this phase, your line of credit is open, and you can use it as you wish. The only payments required from you during this period are interest payments on the money you borrow. This period typically lasts about 10 years. 
2. Repayment period: Once your draw period ends, you must make repayments based on the initial amount and interest. This period can last 20 years or more. 

Another factor is that HELOCs have variable interest rates. That means its interest rates fluctuate in response to market changes, and your monthly payments vary. It will increase as interest rises and decrease if interest falls. As a borrower, you must prepare for these fluctuations. 

Key features

• You have access to a secured line of credit using your home as collateral.
• You can access funds when needed, up to a predetermined credit limit. 
• It has variable interest rates. 
• Flexible repayment periods. 
• Payments during the draw period are only interest on money borrowed.
• You can use the funds for any purpose.

Pros

• You can use as much of your credit line as you want. 
• Variable interest rates mean interest may drop.
• It’s easier to get than other financing options. 
• You have access to a credit line that you can tap into for emergencies. 
• It has lower interest rates than unsecured loans.

Cons

• Variable rates mean interest can increase suddenly, putting you in greater debt.
• This fluctuating interest makes it harder to budget each month. 
• You can lose your home if you’re not able to repay. 
• It’s tempting to spend up to your credit limit. 

What is a Home Equity Loan?

Similar to a HELOC, a home equity loan is one that allows you to borrow money using the equity of your home. However, instead of access to a line of credit, you get a lump sum of money. This loan has fixed monthly payments and interest rates. It’s ideal for one-time expenses like home renovations, medical bills, or debt consolidation. 

Key features

• You get a lump sum of money based on your home’s equity. 
• It has a fixed interest rate. 
• Its repayments are in equal monthly installments over a set term. 
• You can receive the full loan amount once. 
• Perfect for significant, one-time expenses. 

Pros

• Its fixed interest rates and monthly repayments make budgeting easier. 
• It has lower closing costs than refinancing your home.
• You receive a fixed amount up front, making impulse spending less likely. 
• You may be able to deduct interest on your income taxes if you’re using the money for home improvements. 

Cons

• You can’t access more money if an emergency occurs.
• You risk losing your home if you default on the loan payments. 
• You will have to refinance if you want to get lower interest rates.

Which is best? HELOC or Home Equity Loan

The answer depends on your financial situation and what you need the money for. Are you borrowing for spending needs as they arise, or do you need the money now?

Opt for a HELOC if you want to borrow cash for several minor expenses for extended periods. It’s also a good option if you want to have money on hand for future emergencies. However, you need to keep a handle on your impulse spending if you go for this option. 

A home equity loan is best if you need a fixed amount for a one-off expense. It’s a great option if you know exactly how much money you need and if you have a fixed monthly income to repay the loan. To ensure you’re getting the most competitive rates and terms, it’s wise to compare offers from some of the best home equity lenders before making a final decision.

However, this is just a generalization of which financing option is best for which kind of borrower. The final decision comes down to you. Consider your repayment capabilities and how you wish to spend the money. It is best to communicate with different lenders to see that you get the best interest rate and loan repayment terms possible.

Read more: Can home equity boost your real estate portfolio?

Final Thoughts

There are plenty of factors to consider when it comes to home loans, like whether you need quick money or a line of credit for several years. Whether HELOC or a home equity loan is best depends entirely on your needs and financial situation. 

You need to understand how you’ll be spending the money and how capable you are to repay the loans — or else you risk losing your house. 

Written by Billy Guteng. May 6, 2025

Billy is a content writer for Kukun. He was born in France, and has lived in multiple cities around the world ever since. He loves art, design and architecture as well as construction and real estate.