HELOC vs. home equity loan

Both borrow against your home without touching your first mortgage. One is a line of credit, the other a lump sum.

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Side by side

The middle path

Many HELOCs let you lock part of the balance at a fixed rate. Draw for the project, then fix what you've used. See fixed-rate HELOC options.

For debt consolidation

If you'll draw the full amount on day one to pay off cards, a fixed home equity loan protects you from rate rises. A HELOC with a fixed-rate lock does the same while keeping a line open. Run both in the debt payoff calculator.

Example: $50,000 for two different needs

A known, one-time cost, such as paying off $50,000 of cards: a fixed home equity loan locks the payment, with no draw-period surprise. You pay interest on the full amount from day one, which is fine because you use it all on day one.

A cost that arrives over time, such as a renovation billed in four stages: a HELOC lets you draw $12,500 at a time, so in the early months you pay interest on a fraction of the total. Over a six-month project, that can save hundreds to a couple of thousand dollars in interest compared with taking the full $50,000 up front.

Rates and fees

Home equity loans usually carry a fixed rate somewhat above the starting rate on a variable HELOC, because the lender takes the rate risk. Closing costs are similar, though home equity loans more often have an origination fee. Compare the APR on the home equity loan with the HELOC's current APR plus your view of where rates are heading.

Risk differences

• A HELOC's payment can rise with rates and jumps when the draw period ends.
• A home equity loan's payment never changes, but you can't borrow more without a new loan.
• A HELOC can be frozen or reduced if your home's value drops; a home equity loan, once funded, can't.

A simple way to choose

1. Do you know the exact amount and need it now? Home equity loan.
2. Will costs arrive over months, or are you unsure of the total? HELOC.
3. Would a payment increase of 20%–30% strain your budget? Lean toward the fixed loan or a HELOC with a fixed-rate lock.

Mistakes to avoid

• Choosing a home equity loan for a project billed in stages, and paying interest on money sitting idle.
• Choosing a HELOC for a one-time payoff and then leaving it interest-only.
• Comparing a HELOC's intro rate with a home equity loan's fixed rate.

Related question: HELOC vs. home equity loan vs. cash-out refinance

Also asked

Can I have a HELOC and a home equity loan on the same home?

Rarely, because one would be a third lien behind your mortgage. Many HELOCs let you lock part of the balance, which gives you both in one account.

Is a HELOC or a home equity loan easier to qualify for?

Qualifying for a HELOC and a home equity loan is similar. Some lenders qualify a HELOC on a payment calculated from the full line, which can make a home equity loan easier to fit in your debt-to-income ratio.

More in HELOC guides

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• HELOC vs. reverse mortgage
• HELOC vs. 401(k) loan
• HELOC vs. credit card
• Paying off your mortgage with a HELOC
• HELOC or home equity loan for debt consolidation?
• Paid-off home: HELOC or cash-out refinance?
• HELOC vs. personal line of credit

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