HELOC Vs. Home Equity Loan: What's The Difference?

Key takeaways

Home equity loans and HELOCs (home equity lines of credit) both allow you to borrow against your ownership stake in your home, using the property as collateral.
Home equity loans’ fixed rates are a good fit for people who want payment stability and know how much they need to borrow. HELOCs typically have variable rates and flexible borrowing limits, making them a good choice for people who need ongoing access to funds.
Compare monthly payments, borrowing flexibility and your comfort with the rate structure to determine which product is best aligned with your financial goals.

Home equity lines of credit (HELOCs) and home equity loans are two ways of borrowing money against the ownership stake you have in your home. Both typically allow you to tap up to 80 or 85% (or sometimes even more) of your home’s value, minus your outstanding mortgage balance.

But these two borrowing tools differ in several ways, including how their interest rates work, how you receive funds, and how you repay the debt.

Let’s look more closely at the differences between HELOCs and home equity loans and how to determine which product would work best for you.

What are HELOCs and home equity loans?

While they’re both borrowing methods, backed by your home as collateral, home equity loans and HELOCs work differently. A home equity loan is an installment loan that delivers a lump sum at a fixed interest rate and repayment term. A HELOC is a revolving debt that offers an amount of funds (a replenishable balance, similar to a credit card limit) you can draw on, at a variable interest rate. You can borrow for a set number of years, then repay for a subsequent period.

Both products generally offer lower interest rates than credit cards and personal loans because they’re secured by your home. While home equity borrowing costs have come down from their 2023 highs, rates are above the historic lows borrowers saw just a few years ago. Rates are just one of many key factors homeowners need to evaluate before deciding to tap into their home equity.

Key differences between HELOCs and home equity loans

The home equity line of credit vs loan decision often comes down to what you want more: flexibility or predictability. Here’s a deeper look at what sets them apart:

Home Equity Loan	HELOC
Fixed interest rate	Variable interest rate
Payments remain the same for life of loan	Monthly payments may increase or decrease
Receive funds in one lump sum	Withdraw funds against credit line as needed over a prescribed period
Interest is applied to the entire loan amount	Interest charged only on withdrawn funds
Repayments of principal begin immediately	Repayments of principal can be postponed

$11.6 trillion

The sum total of tappable equity – the amount that can be accessed while still leaving a 20 percent equity cushion – possessed by U.S. homeowners with mortgages.

Source:

ICE Mortgage Technology August 2025 “Mortgage Monitor” report

Home equity loan vs. line of credit pros and cons

Home equity loans and HELOCs have unique advantages and disadvantages. It’s not a question of which one is the better product. It’s about what works best for your situation.

Home equity loan

Pros

Fixed interest rate and predictable monthly payments, making budgeting easier
Ideal for one-time expenses with a known cost, such as debt consolidation or a major renovation
Often low or no origination fees
Potentially tax-deductible if used for home improvements
Lump sum received at closing for full use

Cons

Must know exact borrowing amount upfront
Over-borrowing means paying interest on unused funds
Requires sufficient home equity (typically 15%–20%)
Risk of foreclosure if payments are missed
If home values drop, you could end up “upside down” on your mortgage

HELOCs

Pros

Interest-only payments may be allowed during the draw period, lowering monthly costs
You borrow only what you need; interest applies to used funds
Some allow you to set a fixed rate for stability on some or all of your balance
Flexible access to funds for ongoing or uncertain expenses
Useful for projects with changing or staged costs (e.g., renovations)

Cons

Variable rates can raise payments over time
Budget risk due to fluctuating monthly payments
Fees may include annual charges, prepayment penalties, or conversion costs
Missed payments can cause you to lose your home to foreclosure
Lender may reduce or freeze the credit line if home values fall or a recession occurs.

Bankrate insight

For insight into the movement of home equity rates, look no further than the Fed. Most HELOCs are tied to the prime rate, meaning that Fed decisions can impact whether rates rise or fall. Bankrate forecasts that borrowing costs this year will reach their lowest levels since 2023. The overall path of home equity rates depends on a number of factors, including inflation trends and the overall strength of the economy.

How much can you borrow with a HELOC or home equity loan?

So, how much money can you borrow with a home equity loan or HELOC? In many cases, quite a bit. Lenders often set minimums of $10,000, and maximums can run into six figures.

The exact amount you can borrow, though, will depend on a few factors, including your equity stake and the maximum equity percentage that your lender will let you borrow. Your mortgage balance also plays a role, because your lender usually requires your overall home-debt load to stay below a certain percentage of your home’s value.

For example, let’s say your home is valued at $350,000, and you still owe $150,000 on your mortgage. This means you’ve built $200,000 in equity — but it doesn’t mean you can access that full amount.

If your lender says that your debt needs to remain below 80 percent of your home’s value, that’s a cap of $280,000. Subtract your remaining mortgage balance from that, and you’re left with a tappable equity amount of $130,000. It’s still a substantial sum, but perhaps not as much as you envisioned.

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How to apply for a home equity loan or HELOC

The application process for home equity loans and HELOCs is similar to applying for a mortgage.

How to obtain a home equity loan

Home equity loans are available through banks, credit unions and online lenders. Some offer online prequalification tools that let you view loan offers with estimated monthly payments and terms without impacting your credit score. However, if the tools are used to actually pre-approve you for a loan, they could temporarily ding your score, by pulling your credit history. Read the fine print on the lender’s site to confirm.

If you decide to formally apply, you can typically start the process online and upload the requested documentation. You can also visit a branch if you’re doing business with a traditional bank or credit union. Either way, formally applying for a home equity loan will result in a hard pull that impacts your credit score.

Note: Home equity loans come with a three-day cancellation rule, aka the right of rescission. It allows you to back out of the contract without penalty within three business days.

How to obtain a HELOC

The process for obtaining a home equity loan and HELOC are similar, as are the qualifications. However, HELOCs may be harder to get in some cases, as they can carry more stringent criteria.

The three-day right of rescission rule also applies for HELOCs.

Will you qualify for a HELOC or home equity loan?

Each lender has its own eligibility criteria for home equity loans and HELOCs. However, here are some general guidelines to keep in mind:

Credit score: A credit score of 640 could be enough with some lenders, but aim for 700 or higher to have the best approval odds (and get the best interest rates).
Income: Your income should be consistent and verifiable.
Debt-to-income (DTI) ratio: You’ll need an acceptable DTI to qualify for funding, around 43%.
Equity: Lenders generally allow you to borrow from 80 and 90% of your home equity, which is the difference between your home’s value and what you owe.
Appraisal: The lender will require an appraisal to determine how much your home is worth or its fair market value. (Note: The appraisal is arranged by the lender, and the fee is included in the closing costs).

How do I decide between a HELOC and a home equity loan?

How to decide between a home equity loan and a HELOC? Ask yourself these questions.

What’s the nature of your need?

A home equity loan could be a good fit if you know what you’ll use the funds for, when you’ll need them and exactly how much you’ll need. However, a HELOC could work better if you don’t know exactly the total expense you’ll incur, and/or you’ll need to keep a ready source of funds on hand. Or, if your costs will extend over a long period of time (like paying a home contractor in installments, or college tuition for four years).

Are you a set-it-and-forget-it type?

Do you prefer predictability in your obligations? A home equity loan is ideal if you like a fixed interest rate and monthly payment that won’t ever change. And you’re not an interest-rate watcher.

A HELOC, on the other hand, could be ideal if you hate the idea of being locked into a higher-than-market interest rate, or paying interest on money you haven’t spent. Also, you don’t mind — and have the means to cover — fluctuating payments.

Are you disciplined?

HELOCs can be a slippery slope to more debt than you can handle if you only repay the interest during the draw period and none of the principal. Taking this approach can cause sticker shock when the HELOC repayment phase begins and you have a substantial debt left to repay. Unless you expect to come into a significant sum of money or windfall in the future, it’s a good idea to pay both principal and interest during the draw period on a HELOC, and not give in to the temptation of minimal, interest-only payments.

If that’s not you, a home equity loan might be a better choice, as it imposes a repayment schedule on you, similar to your mortgage. It helps to prevent the debt from becoming unmanageable.

Ultimately, I’d say the decision hinges upon your overall financial situation and what you’re planning to use the money for. For example, if you really need to finance a new roof, a home equity loan or line of credit could be a viable option. If it’s something more discretionary, maybe it makes sense to hold off until you can make that purchase without taking on debts. While home equity rates are not nearly as high as the 20% average credit rate, it’s still fairly high-cost debt.

— Ted Rossman, Bankrate Principal Financial Analyst

Bottom line on home equity loans and HELOCs

Home equity loans and HELOCs both allow you to borrow money against your home equity, but they’re not the same.

If you want an upfront lump sum and a predictable repayment schedule and sums, then a home equity loan might be the right choice. The trade-off is that you’ll need to know exactly how much you want to borrow; otherwise, you could end up with more or less than you need. But if you do, say to settle a bunch of credit card bills, then the loan could be ideal.

On the other hand, if you’re unclear how much financing you’ll need or want the option to take out more money as you need it — and only incur interest on an actual withdrawal — then a HELOC might be a better option. But you need to be disciplined in paying off the principal and be prepared for swings in your monthly payments.

With homeowners still holding near record levels of equity, both home equity loans and HELOCs are popular financing tools. However, today’s rates are still significantly higher than the ultra-low-rate era, making it important to compare payment estimates, fees and repayment structures before borrowing.

Frequently asked questions

According to TransUnion’s Q4 2025 Credit Industry Insights Report, home equity borrowing continued its momentum at the end of the year. HELOC and home equity loan originations rose for the sixth straight quarter as homeowners tapped into record levels of equity. Higher rates have reduced the appeal of cash-out refinancing. Also, rather than replacing their existing low-rate mortgages with new loans carrying much higher interest rates, many homeowners are turning to HELOCs and home equity loans to access cash.

Demand for home equity borrowing has remained strong even as home equity growth has slowed. As of the fourth quarter of 2025, mortgage holders had roughly $11 trillion in tappable home equity, unchanged from the same time a year ago, according to ICE Mortgage Technology, a real estate data firm.
Yes, it’s possible to obtain a HELOC or home equity loan with bad credit. It’s not likely that you’ll get the most competitive interest rate, but if you have reliable income and a relationship with a lender, you could qualify for a loan.

There are also lenders that approve home equity loans and HELOCs for borrowers who have FICO scores as low as 620, provided that you meet other requirements related to debt levels, equity and income.

In addition to a credit score of at least 620, in order to earn approval, you’ll likely need about 15% to 20% equity in your home and a maximum debt-to-income (DTI) ratio of 43%, or up to 50% depending on the lender. Lenders also like to see an on-time mortgage payment history.
Both home equity loans and HELOCs allow you to use the funds however you see fit. Many borrowers use them to pay for major home repairs or renovations, like finishing a basement, remodeling a kitchen or updating a bathroom. Others use them to pay off high-interest credit card debt, start a business or cover college costs.
Your monthly payment depends on several things, including the amount you choose to borrow, your interest rate, loan term and product type.

With a home equity loan, payments are typically fixed, meaning you’ll make the same monthly payment throughout the repayment period.

With a HELOC, your payments will rise or fall because most HELOCs have variable interest rates. Also, once the HELOC repayment period begins, your monthly payments will likely increase, as you are paying both principal and interest. Take advantage of online calculators to help you estimate your monthly payment before applying.
The right home equity product depends on how you plan to use the money.

If you prefer a lump sum for a one-time expense and predictable monthly payments, a home equity loan could be a smart choice. However, a HELOC may work better for your situation if you want flexibility and the ability to access to funds over time. Comparing interest rates, fees, repayment terms and borrowing flexibility can help you determine which product best meets your needs.