When you borrow against your home equity, two common options are a home equity loan and a home equity line of credit (HELOC). Both are second mortgages secured by your home, but they work very differently. Understanding the home equity loan vs. HELOC difference helps you choose the one that fits your goals.
The short answer: a home equity loan is a lump-sum loan with a fixed rate and set repayment term. A HELOC is a revolving line of credit you can draw from as needed, often with a variable rate. Both put your home at risk if you cannot pay. See our guide on how much equity you need for a HELOC to check eligibility.
What is a home equity loan?
A home equity loan is a second mortgage that gives you a lump sum of cash up front. You receive the full amount at closing and repay it with a fixed monthly payment over a set term, often 10 to 30 years.
Key features:
- Lump sum: you get all the money at once.
- Fixed rate: most home equity loans have a fixed interest rate, so your payment stays the same.
- Set term: you know when the loan will be paid off.
- Second lien: it sits behind your first mortgage.
A home equity loan may fit when you know exactly how much you need and want a predictable payment.
What is a HELOC?
A HELOC is a revolving line of credit secured by your home, similar to a credit card but with your home as collateral. You can borrow, repay and borrow again during the draw period.
Key features:
- Revolving credit: borrow what you need, when you need it, up to your limit.
- Variable rate: most HELOCs have a variable interest rate that can change.
- Draw period: a set time (often 10 years) when you can draw funds, sometimes interest-only.
- Repayment period: after the draw period, you repay the balance over a set term.
- Second lien: it sits behind your first mortgage.
A HELOC may fit when you need flexibility — for example, ongoing home improvements or an emergency fund you can draw on as needed.
Key differences
How you receive funds
- Home equity loan: lump sum at closing.
- HELOC: draw from a line of credit as needed.
Interest rate
- Home equity loan: usually fixed, so your payment is predictable.
- HELOC: usually variable, so your payment can rise or fall with the rate.
Repayment
- Home equity loan: fixed monthly payment over a set term.
- HELOC: often interest-only during the draw period, then principal and interest during repayment.
Draw period
- Home equity loan: no draw period — you get the funds once.
- HELOC: a set draw period when you can borrow and repay repeatedly.
Fees
- Home equity loan: closing costs similar to a first mortgage.
- HELOC: may have annual fees, draw fees or early-closure fees. Some HELOCs have low or no closing costs, but check the terms.
Which is right for you?
Choose a home equity loan if you:
- Know exactly how much you need
- Want a fixed payment you can budget around
- Prefer predictability
Choose a HELOC if you:
- Want flexibility to borrow as needed
- Have ongoing or uncertain costs
- Are comfortable with a variable rate
Some homeowners use a HELOC for flexibility and a home equity loan for a one-time need. The right choice depends on your goals and your comfort with risk.
Risks to consider
Both options put your home at risk:
- If you cannot pay, the lender can foreclose.
- Variable HELOC rates can rise, raising your payment.
- Borrowing against your home increases your total debt.
- Falling home values can leave you owing more than the home is worth.
Using home equity to pay off unsecured debt can lower your monthly payment, but it turns that debt into debt secured by your home. Read our guide on using a HELOC to pay off credit card debt for the trade-offs.
How to decide
- Decide how much you need and what you will use it for.
- Compare a fixed home equity loan with a HELOC.
- Ask your lender for the rate, payment and total cost of each.
- Consider whether you want a fixed or variable rate.
- Think about how the new payment fits your budget.
Frequently asked questions
Is a HELOC a second mortgage? Yes. A HELOC is a type of second mortgage secured by your home behind your first mortgage.
Which has a lower rate? Rates vary by lender and market. Home equity loans often have fixed rates; HELOCs often have variable rates that may start lower but can rise.
Can I have a home equity loan and a HELOC? Usually you choose one or the other, but some homeowners use different products at different times. Ask your lender about your options.
Do both require an appraisal? Often yes. The lender needs to confirm your home's value to calculate your equity.
Ready to compare your equity options?
When you are ready, get a free quote or get pre-approved with Alex.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. Home equity loans and HELOCs have costs and risks, and your home is the collateral. Speak with a qualified professional about your individual situation.
