Quick answer

Both HELOCs and home equity loans let you borrow against your home’s equity, but they suit different needs. Choose a home equity loan for a single, known cost (large renovation, debt payoff) when you want fixed payments. Choose a HELOC for ongoing or unpredictable costs (staged remodels, emergency repairs) when you value flexibility and access to funds on demand.

How each product works

  • Home equity loan: You borrow one lump sum and repay principal and interest in fixed monthly payments over a set term (commonly 5–30 years). Interest is usually fixed, so your monthly payment stays stable.
  • HELOC: A revolving line of credit secured by your home. During the draw period (commonly 5–10 years) you can borrow up to your credit limit, and many plans let you pay interest-only on the amount drawn. After the draw period ends you enter repayment and must repay principal plus interest, which can increase monthly payments.

(Consumer Financial Protection Bureau: https://www.consumerfinance.gov/)

Interest rates and payment structure

  • Fixed-rate home equity loans: The predictability helps budgeting. If rates are low and you want stability, a fixed-rate loan is attractive.
  • Variable-rate HELOCs: Most HELOCs have variable rates tied to an index (e.g., Prime) so payments can rise if market rates increase. Some HELOCs offer a conversion option to lock in a fixed rate on outstanding balances—read the terms and conversion fees carefully.

In my practice I often see borrowers underestimate how quickly a variable HELOC payment can rise after the draw period, especially when interest-only payments convert to principal-plus-interest. Expect a payment shock if you don’t plan ahead.

How much you can borrow (CLTV explained)

Lenders calculate a combined loan-to-value (CLTV) ratio: existing mortgage balance plus new borrowing divided by the home’s appraised value. Many lenders commonly allow about 80–85% CLTV; some may go up to 90% in certain cases but that raises both rate and underwriting scrutiny (Federal Housing Finance Agency: https://www.fhfa.gov/).

Example: Home value $400,000; existing mortgage $250,000. At 85% CLTV the maximum combined debt allowed is $340,000. That leaves $90,000 available for a second lien (HELOC or home equity loan) before hitting the 85% threshold.

Fees and closing costs to expect

Both products can have upfront costs, though specifics vary by lender:

  • Appraisal fee
  • Title search/insurance or second-mortgage title endorsement
  • Origination fee or processing fee
  • Recording fees and closing costs
  • Annual fees or inactivity fees (more common with HELOCs)

Some lenders offer no-closing-cost HELOCs but charge higher interest or fees elsewhere. Always ask for a Loan Estimate or comparable written disclosure and do the math over the expected life of the borrowing.

When a home equity loan is usually the better choice

  • You have one large, planned expense (major remodel, car purchase, large medical bill) and want a predictable monthly payment.
  • You prefer a fixed interest rate to lock in borrowing cost.
  • You plan to pay the debt over a longer, steady schedule.

Case example from my practice: A homeowner needed $60,000 for a kitchen and opted for a 10‑year fixed home equity loan. The fixed payment simplified the household budget and avoided later rate risk.

When a HELOC is usually the better choice

  • Your project has uncertain or staged costs (ongoing renovations, repairs over multiple seasons).
  • You want a credit reserve for emergencies without reapplying for a loan each time.
  • You can manage variable-rate exposure and have a plan if rates rise.

Real client scenario: A homeowner used a $35,000 HELOC to fund staggered repairs after storm damage. Access to funds over several months and interest-only payments during the draw period helped cash flow.

Risks and how to manage them

  • Collateral risk: Both products use your home as collateral. Falling behind on payments can lead to foreclosure.
  • Interest-rate risk (HELOC): Variable rates can increase payments. Build a buffer into your budget and consider converting part of the balance to a fixed-rate loan before the draw period ends.
  • Overborrowing: Easy access to a HELOC can encourage unnecessary spending. Treat it like a tool, not free cash.

Mitigation tips: keep an emergency fund, avoid borrowing the full available amount unless needed, and create a repayment plan before taking the credit line.

Tax considerations (general guidance)

Under current U.S. tax rules, interest on home equity loans and HELOCs may be deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan. The Tax Cuts and Jobs Act (2018) tightened these rules; consult the IRS for details and a tax advisor for your situation (IRS: https://www.irs.gov/ and Consumer Financial Protection Bureau guidance).

Choosing between a HELOC and a home equity loan — a decision checklist

  1. Define the purpose: one-time cost (loan) vs ongoing or uncertain costs (HELOC).
  2. Compare interest rates: fixed vs introductory/variable.
  3. Add all costs: appraisal, origination, annual fees, possible conversion fees.
  4. Check CLTV limits and how much equity you truly have (get a current appraisal or use local comps).
  5. Plan for rate changes: model payments if rate increases 2–4 percentage points.
  6. Consider alternatives: cash-out refinance, personal loans, or contractor financing.

For a comparison of alternatives, see our guide on HELOCs vs cash-out refinances: HELOCs vs Cash-Out Refinances: Which Option Fits Your Goal?.

If your goal is debt consolidation, read more: HELOC vs Home Equity Loan: Which Is Better for Debt Consolidation?.

Common mistakes I see (and how to avoid them)

  • Using a HELOC for non-home investments without a plan. If the investment fails, you still owe the lender and risk your home.
  • Focusing only on initial monthly payments and ignoring long-term cost or post-draw repayment increases.
  • Forgetting fees: a low interest rate can be offset by high closing costs.

Avoidance strategy: run a 5- and 10-year cash-flow projection for each option and review the lender’s fee schedule.

How to apply and negotiate better terms

  • Shop multiple lenders: credit unions, banks, and online lenders price HELOCs and home equity loans differently.
  • Improve your profile: pay down debts to lower your CLTV, and correct any errors on your credit report to improve your rate offer.
  • Ask about rate caps, conversion options, early repayment penalties, and whether the HELOC has an annual fee.

Frequently asked practical questions

  • Can I have both a HELOC and a home equity loan? Yes, some borrowers carry both (for example, a fixed second mortgage plus a small HELOC for ongoing expenses). Lenders will check combined CLTV and overall affordability.
  • How long is the draw period? Commonly 5–10 years, but terms vary. Confirm the lender’s timeline and what payments look like after the draw period ends.
  • Will a HELOC affect my credit score? Opening new credit can cause a small, temporary dip; the utilization of the line and payment history affect your score over time.

Final recommendation

If you need a predictable payment and fixed rate for a single, large expense, a home equity loan often fits best. If you want flexibility to access funds over time and can tolerate variable rates, a HELOC may be better. In every case, quantify total cost, plan for rate changes, and confirm tax treatment with your tax advisor.

For further reading on HELOC draw-period mechanics and risks, see our in-depth piece: HELOC Draw Periods and Interest Calculations: What Borrowers Should Know.

Professional disclaimer: This article is educational and does not replace personalized financial or tax advice. In my practice as a financial educator and CPA, I recommend consulting your lender and a tax professional before borrowing. Authoritative sources used include the Consumer Financial Protection Bureau and the Federal Housing Finance Agency.