What is the difference between a home equity loan and HELOC?

Mar 28, 2025

Borrowing Money Against Your Home’s Value

Ever wished you could tap into the rising value of your home without selling it? Well, you can! Home equity loans and HELOCs allow you to do just that. But what’s the difference between these two options? Let’s break it down.

What is a Home Equity Loan?

A home equity loan is a one-time lump sum loan that uses your home’s equity (the portion you’ve already paid off) as collateral. It’s like taking out a second mortgage on your house. You receive the full loan amount upfront and then make fixed monthly payments over a set period, usually 5-15 years.

Think of it like borrowing a fixed amount from your home’s “piggy bank” and then paying it back in installments.

What is a HELOC?

HELOC stands for Home Equity Line of Credit. Instead of a lump sum, it works more like a credit card. You’re approved for a maximum borrowing limit based on your home’s equity, and you can draw funds as needed during the “draw period” (usually 10 years).

You only pay interest on the amount you’ve actually borrowed, and you can pay it back and reborrow as needed. After the draw period ends, you enter the repayment period, where you can no longer borrow but must pay off the outstanding balance.

It’s like having a flexible piggy bank that you can dip into and replenish as needed, but you eventually have to pay it all back.

Surprising Facts

You can use home equity loans and HELOCs for almost any purpose, from home renovations to debt consolidation or even funding a business.
HELOCs often have variable interest rates, so your monthly payments can fluctuate over time.
If you fail to make payments, the lender can foreclose on your home since it’s used as collateral.

Pros and Cons

Home Equity Loan Pros:

Fixed interest rate and fixed monthly payments
Receive the full amount upfront

Home Equity Loan Cons:

Higher interest rates than HELOCs
Must start repaying immediately

HELOC Pros:

Lower interest rates (initially)
Only pay interest on what you borrow
Flexible borrowing during the draw period

HELOC Cons:

Variable interest rates can increase over time
Potential for overspending due to easy access to credit

Learn More

Mortgage Refinancing: Replacing your existing mortgage with a new one, often with better terms or rates.
Cash-Out Refinance: Refinancing your mortgage for more than you owe, allowing you to pocket the difference in cash.
Second Mortgage: Taking out an additional mortgage on your home, separate from your primary mortgage.