HELOC vs. Home Equity Loan: What's the Difference?

Both a HELOC and a home equity loan let you borrow against the value you've built in your home, and both put the home itself on the line. The difference is how the money arrives and what the rate does afterward: a home equity loan is a lump sum at a rate fixed for the life of the loan, while a HELOC is a credit line you draw from at a rate that moves with the market. Which one costs you less comes down to whether you already know the amount you need.

What's the difference between a HELOC and a home equity loan?

Both HELOCs and home equity loans are forms of credit secured by equity in your home. Your equity is your home's value minus what you still owe on it. There are important differences between these two options, though.

A home equity line of credit (HELOC) is a line of credit you can repeatedly borrow against and pay back down, while a home equity loan works more like a traditional installment-based loan. With a home equity loan, you receive a lump sum of money that you pay back in equal monthly payments.

Because these kinds of credit are secured by your home, you risk losing your home to foreclosure if you stop making payments. However, because secured loans are usually much less risky for lenders, HELOCs and home equity loans tend to have lower interest rates than credit cards, personal loans, and other kinds of debt.

Securing the debt with your home does come with one protection: You get three business days after closing to cancel, no penalty and no explanation needed. The lender can't release your money until then, so if you change your mind, put it in writing and keep a record of when you sent it.

HELOC vs. home equity loan: How the rate is set on each

HELOC rates are variable. Most are set at the prime rate plus a margin your lender chooses based on your credit, how much of your home's value you're borrowing against, and the size of the line. The prime rate was 6.75% as of September 10, 2026, which means a HELOC quoted at prime plus 1% would start at 7.75%, and it moves whenever the prime does.

Home equity loans work the other way: The rate is fixed at closing and stays there for the full term. Fixed rates usually start a little higher than a HELOC's variable rate, but it could be the right trade-off if a larger payment isn't something your budget can comfortably absorb down the line.

Read more >> How to Build Home Equity Faster

How a HELOC works

A HELOC is a revolving line of credit, but it doesn’t work exactly like a credit card. With a credit card, you can normally keep borrowing up to your credit limit and repaying the debt indefinitely.

But when you take out a HELOC, you can’t use it forever. Most lenders divide the loan term into two periods:

• Draw period of 5 to 10 years — you can borrow and repay up to your limit as often as you want, and many lenders only require interest payments in this period.
• Repayment period of 10 to 20 years — the line of credit closes, and you start paying principal plus interest on whatever you owe.

Most HELOCs have variable interest rates, so your interest rate may rise and fall based on current market rates.

Each HELOC lender sets its own borrowing limits, with most lenders allowing you to borrow up to 85% of your home's value through a combined loan-to-value ratio (CLTV) that includes both your primary mortgage balance (if you have one) and your HELOC amount together.

Say your home is worth $500,000 and you still owe $300,000 on your mortgage. At an 85% ceiling, your mortgage and your HELOC together can't exceed $425,000. Subtract the $300,000 you owe, and your HELOC tops out at $125,000.

⚠️ What to watch for

Interest-only payments are what make a HELOC appealing, and they're also the catch. Say you owe $50,000 at 7.75%. During the draw period, paying interest only costs about $323 a month. Once the repayment period starts and you begin paying down the balance, that jumps to roughly $600 on a 10-year schedule.

It doesn't creep up, either. It changes on a set date you'll know years in advance.

If that higher number would be a stretch, you have two options: pay down the balance while you're still in the draw period, or choose a home equity loan instead, where the payment stays the same from Day One.

Read more >> What Is a HELOC and How Does It Work?

How a home equity loan works

On the other hand, home equity loans work a lot like car loans and other secured installment loans. When you apply and get approved, you get a lump sum of money. You then pay it back in equal monthly payments over the course of the loan term, which is typically 5 to 20 years, depending on the amount you borrow.

Usually, your home equity loan borrowing power is the same or almost the same as your HELOC borrowing power. Most lenders let you borrow up to 85% of your home’s value minus your current mortgage balance.

Unlike HELOCs, though, most home equity loans come with fixed interest rates.

⚠️ What to watch for

With a home equity loan, you take the full amount at closing, and interest starts accruing immediately. That's fine when you know the cost (say, for a debt consolidation), but it can get expensive if you're guessing.

Say you borrow $50,000 at 8.25% over 15 years for a renovation and the work comes in at $35,000. That extra $15,000 costs about $146 a month and roughly $11,200 in interest if you carry it to term. For money you didn't need.

If you can't confirm the amount you need in advance, that uncertainty is the argument for a HELOC, where you draw and are charged on only what you use.

Read more >> How to Use a Home Equity Loan for Debt Consolidation

‍A third option: Cash-out refinance
‍A HELOC or home equity loan sits alongside your existing mortgage. A cash-out refinance replaces it with a bigger one and hands you the difference, so the new rate applies to your whole balance, not just the cash you take out.

Check your current mortgage rate against today's. If yours is lower, refinancing costs you that rate on your whole balance, and the other two options usually win. If yours is the same or higher, it's worth getting quotes on all three.

HELOC vs. home equity loan: Which should you choose?

Home equity loans are best for one-time expenses where you already know the cost. Many people use them to consolidate high-interest debt, but be clear on the trade-off. Credit card debt is unsecured: a credit card issuer can sue you, but it can't foreclose on your home. Moving that balance onto your home changes what's at risk. The cards also stay open once they're paid off, so the balance can rebuild while the new loan is still there.

If you're weighing this against something like a debt management plan or bankruptcy, a licensed attorney or nonprofit credit counselor can tell you which fits before you sign anything. The National Foundation for Credit Counseling offers free or low-cost counseling at 800-388-2227.

How to qualify for a HELOC or home equity loan

Exact qualifications depend on the individual lender, but most look for:

• At least 15% to 20% equity in your home
• Proof of enough income to reliably make payments
• A debt-to-income (DTI) ratio of 43% or less (though some lenders go higher)
• A strong repayment history with few to no late payments
• Proof of homeowners insurance

Requirements can vary, but most lenders look for a credit score of 640 or higher. An online or digital lender may take a lower credit score, but you could end up paying a higher rate.

Bottom line

A home equity loan gives you a lump sum at a fixed rate; a HELOC gives you a credit line you draw from, usually at a variable one. Which fits depends on whether you know what you need to borrow and how much rate certainty you want.

Either way, your credit sets the terms. And because your home secures the debt, those terms matter more than they would on an unsecured loan. A stronger profile means a lower rate and potentially access to more of your equity.

If you're a few months out from applying, Kikoff's Credit Account reports your on-time payments to all three credit bureaus, with no credit check and plans starting at $5 a month.