Both let you borrow against the equity in your home, and people use the names almost interchangeably. They behave very differently, though, and picking the wrong one is an expensive mistake that lasts years.
The core difference
| Home equity loan | HELOC | |
|---|---|---|
| How you get the money | One lump sum | Draw as needed |
| Interest rate | Usually fixed | Usually variable |
| Payments | Fixed, predictable | Change with balance and rate |
| Interest charged on | Full amount from day one | Only what you've drawn |
| Best for | Known one-time cost | Ongoing or uncertain cost |
Think of a home equity loan as a second mortgage — borrow $40,000, get $40,000, pay it back on a set schedule. A HELOC is closer to a credit card secured by your house: approved for $40,000, draw $5,000 this month and nothing next, pay interest only on what you've actually used.
How much can you borrow?
Most lenders let you borrow up to a combined loan-to-value of 80–85%. That means your existing mortgage plus the new borrowing can't exceed roughly 85% of your home's value.
On a $400,000 house with a $250,000 mortgage at 85% CLTV: $400,000 × 0.85 = $340,000, minus the $250,000 you already owe, leaves about $90,000 available. Our HELOC calculator and home equity loan calculator both run this from your own numbers.
The HELOC structure people miss
HELOCs run in two phases, and the transition between them catches a lot of borrowers off guard.
The draw period — typically 10 years. You can borrow, repay, and borrow again, and many lenders let you pay interest only. Payments feel small and manageable.
The repayment period — typically 10 to 20 years after that. The tap closes. You can't draw any more, and you now pay principal and interest on the balance.
Variable rate is the real gamble
Most HELOCs are variable, tied to a benchmark rate plus a margin. When rates rise, your payment rises, and there's nothing you can do about it. A home equity loan's fixed rate means the payment you sign for is the payment you make in year eight.
That's the honest trade: HELOCs usually start cheaper and offer flexibility, but you're carrying the interest-rate risk. Fixed loans cost a bit more for certainty. Which is right depends less on rate forecasts — nobody's are reliable — and more on whether a payment increase would genuinely hurt you.
Which one fits your situation?
Take the home equity loan for a known, one-time cost: consolidating debt, a single renovation with a firm quote, a wedding. You know the number, you want the rate locked, you want a fixed payoff date.
Take the HELOC for spending that arrives in stages or that you can't size yet: a phased renovation, an emergency backstop you might never draw on, or income that's lumpy. You only pay interest on what you use, which is genuinely valuable when the timing is uncertain.
Before you sign either
Ask about closing costs, annual fees, early-closure fees, and — for a HELOC — the rate cap and whether there's a minimum draw. Ask specifically what the payment looks like on day one of the repayment period, not just during the draw. Run both through the HELOC calculator and the home equity loan calculator before you commit.
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Frequently Asked Questions
What is the difference between a HELOC and a home equity loan?
A home equity loan pays a lump sum at a fixed rate with fixed payments. A HELOC is a revolving credit line you draw from as needed, usually at a variable rate, and you only pay interest on what you've drawn.
Is a HELOC or home equity loan better?
Neither is universally better. Take a home equity loan for a known one-time cost where you want a locked rate, and a HELOC for staged or uncertain spending where flexibility matters more.
How much can I borrow against my home?
Most lenders allow a combined loan-to-value of 80 to 85%, meaning your existing mortgage plus the new borrowing can't exceed roughly 85% of your home's value.
What happens when a HELOC draw period ends?
You can no longer borrow, and you begin repaying principal plus interest. If you were paying interest only during the draw period, the payment can rise sharply.